An economic transformation requires new forms of leadership

Branson’s B Team: Capitalism driving good

Capitalism 2.0: Part 4: ‘Metamorphosis’

In the previous installment in this series, we asked what the impacts, opportunities, and risks for business could be. Here, we look at how an economic transformation might come about, along with the risks and challenges involved, and how business leaders can help shape the future.

“An invasion of armies can be resisted, but not an idea whose time has come.”
Victor Hugo

The features we have explored within the previous articles in this series might seem somewhat Utopian, especially when viewed from the somewhat challenging, and frighteningly entrenched times we now find ourselves in.

And given the ubiquitous nature of capitalism, one could almost be forgiven for thinking there is no other way, or that changing things is just too difficult to contemplate, let alone do. This is just the way things are – and we just have to make the best of them.

And there are certainly many barriers to shaping and deploying the features of a new system. But lets put things in perspective; the conventional approach to capitalism has only been around for a few hundred years: not that long in the great scheme of things. Nothing lasts forever; things can change; the Berlin Wall was only in place for less than 30 years.

But let’s just explore just a few of the key challenges in making this difficult transition.

Meeting the challenge
Weaning ourselves off the twin drugs of growth and consumption is not going to be easy, when our present-day reality is that most business models are founded on continuous growth – more and more consumption – and the linear take-make-waste economy.

If this is how profits and apparent business success have been generated thus far, it will take a brave and foresighted leader to kill the ‘golden goose’.

Although this choice may become somewhat less daunting, when businesses face up to a new reality – and perhaps sooner than we think – via the intersection of continuing resource/energy cost increases and falling client demand/affordability, set against the backdrop of economic/debt re-structuring, and the growing impacts of climate change on global supply and demand.

It is highly likely that we will all have to revise our expectations, and seek a new way of looking at business success.

Circular economy
It may help here, if we approach the notion of business growth in more unconventional terms. This is where circular economy principles can help, with business activity focused on re-use, repurposing, and recycling.

And this means economic activity and transactions come from within the existing pool of global resources. Profitable enterprise can continue, but only by adapting the business model.

There are some high-profile trailblazers out there. We see Unilever aiming to deliver its range of products using fewer resources, and changing customer behaviours and consumption patterns. And B&Q is working on experimental business models, shifting from selling to leasing, with products configured on cradle-to-cradle designs.

It will be interesting to see how these, and other forward-thinking organisations deliver on this challenge. And I hope they succeed.

But there is a further challenge – how will this shift in business model affect business results?  What will happen to sales, and the bottom line?

Ultimately, by moving to more sustainable models, businesses should be able to retain, or even grow the customer base, if we assume market demand holds up, and customers value the new, differentiated proposition. And while we cannot generalize on the specific cost dynamics within each business model, it is highly likely that some form of transition in results will be experienced.

Profits may not be as large in this brave new world of leasing sustainable products. Or would they? We still need to see more of the emerging evidence.

And any transition could of course be especially difficult if undertaken in a volatile economic climate, as we continue to experience today. There may be a need to revise expectations – a drop in business income could happen – which may present a major challenge to business leaders and shareholders alike.

Headcount reduction is often the conventional reflex response, but this can ultimately be a self-defeating strategy, as we discovered in Part 1. We need to generate employment and sufficient disposable income to keep our economy flowing.

But there is an opportunity to look at this challenge through a different lens, too. If we adopt and extend the principles of waste reduction in our business thinking, and as we spend less money on resources and waste, we can choose to spend more on people – from waste to wages – delivering a growth in people-related costs that is more than offset by a drop in material, resource and waste costs.

Of all the companies I have been studying these last few years, I am still impressed with what Apollo Motor Group has achieved in this respect – preserving jobs and increasing wages, while concurrently reducing resource and waste costs, and increasing margins. The potential here is massive.

In creating the right policy environment for a sustainable economy, a similar challenge exists for our politicians – going for zero, or low growth is hardly seen as a vote-winner – even if the current government has been stress-testing us all with this approach during the last couple of years.

Given how far behind the curve our political leaders really are, it will perhaps be even more important for businesses to take the lead, and show the politicians a positive vision for what is possible, by approaching things in a different and more sustainable way.

New banking system
Moving towards more innovative ownership models can also be difficult, especially for those currently occupying a conventional stock market PLC format. Buying back shares – either directly or through an employee ownership scheme – and re-capitalising the business, can appear to be an expensive and impractical option.

But perhaps there is a workable alternative for some situations? The model deployed by Triodos Bank is worth exploring; shares are owned by a mixture of individuals and institutions (for example, pension funds), but institutional interests are capped at 10%, such that the bank will always be independent.

This blend and diversity of ownership is also traded within a matched bargain market, away from the short-term volatility of the conventional stock market. This helps to maintain the integrity of the bank’s mission and makes a longer-term view workable, while still attracting the necessary external capital required: the best of both worlds, perhaps?

And then there is the huge question of changing the money system itself; can this really change, given the nature of embedded vested interests?

But as we see, time and again throughout history, people are resourceful, innovative and collaborative in seeking and developing better ways – often working around the constraints of existing systems. This is especially true for the financial system.

If the banks don’t lend – we see new sources of finance emerge, such as peer-to-peer lending, which connects borrowers directly with investors.

At a local level, we see the emergence of alternative local currencies, like the Bristol Pound, which aims to keep money flowing in the local economy, and can even be used to pay council tax.

We also see activist movements urging us to move our money so we can put it to a better purpose, and help build a better banking system through our collective buying power.

At a global level, we see the growing influence of The Global Alliance for Banking on Values – making sure we have access to more sustainable banking alternatives, wherever we are in the world.

And we also see enlightened institutions like The Finance Innovation Lab – believed to be the largest social innovation project in Europe, driven by WWF and ICAEW – that provides an open space where people can come together to explore, innovate and evolve the financial system, so that it sustains people and planet.

And this is not just theoretical; the Lab is currently delivering on eight innovations – from helping the transition to a new green economy, to more radical new ideas, like new money systems.

Radical alternatives
And let us not be under any illusion – if the system doesn’t work for the majority, people may find radical alternatives, effectively bypassing mainstream capitalism “forging their own way ahead using network technologies and thinking, to create alternatives to the not-fit-for-purpose status quo”. It could happen, and perhaps has already started.

It would take a very complacent person, to think that things will remain as they are for much longer. But we know there are powerful vested interests, that have prospered under the old order, and perhaps not willing to let go, just yet.

According to Bob Eccles and George Serafeim of the Harvard Business School just 1,000 businesses are responsible for half of the total market value of the world’s 60,000+ publicly-traded companies. They virtually control the global economy. This concentration of power has worrying consequences for both democracy and any potential transition towards a more sustainable and equitable form of capitalism.

And as John Elkington recently shared, it is arguably questionable that capitalism, left to its own devices, could ever fully reform itself: “self-discipline and voluntary initiatives can only take us so far.”

Some will also point to human nature as the ultimate barrier – that self-interest will always be the overriding factor, and will keep the system focused on individual gain, rather than the more collaborative approaches explored.

But as David Korten reminds us, Adam Smith, the often-cited father of the free market believed that “people have a natural and appropriate concern for the well-being of others and a duty not to do them harm. He also believed that government has a responsibility to restrain those who fail in this duty”.

On balance, it would seem that some form of regulation would be required – to create the right framework for business to work within. Stephen Hockman QC points towards a raft of potential regulations that could help create the right environment for responsible capitalism, including: a corporate governance code, a professional code of conduct in banking (similar to those governing doctors and lawyers), more control on executive pay, the creation of new criminal offences, and so on.

He also calls for urgent action in establishing a standing commission on responsible capitalism, to take forward such proposals.

And while we can’t consider every barrier within this space, I think the point is, whatever the challenge, there will always be a way to find solutions. We just need to find new ways of looking at some of these challenges.

But where is the real systemic change going to come from? What are the catalysts?

The greatest movement without a leader?
When you start looking, there is a huge amount of work already going on out there; much of it under the radar, and quite surprisingly, mostly aligned in a coherent and consistent direction.

And perhaps we should expand Paul Hawken’s description of the environmental movement as “the largest movement on earth, a movement that has no name, leader, or location”, to include those working towards a more sustainable form of capitalism – ultimately, it is probably a subset of the same cause.

There are some enlightened individuals driving influential initiatives. Have a close look at the work going on with John Elkington’s Breakthrough Capitalism project – the ambition is impressive. And quite recently Richard Branson has pulled together his B Team, to help make capitalism a driving force for social, environmental and economic benefit.

Pressure groups and think-tanks like the New Economics Foundation (NEF) in the UK and both the New Economics Institute (NEI) and the New Economy Working Group in the US are working hard to promote a better approach to economy.

Global organisations like the Co-op movement are bringing collective ownership models back to the fore – an approach that has experienced a great resurgence in interest since the financial crisis, as co-operatives are proving to be more resilient, and more competitive than conventional businesses.

In a similar vein, there is an increase in social enterprise and alternative business formats, particularly in the US, with the emergence of the Flexible Purposes Corporation and also the B Corporation. Both of these models allow greater flexibility and enable businesses to incorporate a range of goals in addition to the profit motive. And they are growing in popularity.

And quite importantly we see business leaders calling loudly for a new approach and, perhaps surprisingly, for more – not less – regulation.

In the US, the American Sustainable Business Council, representing more than 150,000 members, recently called for a new economy configured on triple-bottom-line principles. And here in the UK, a group of over 50 major businesses recently urged Chancellor Osborne to establish a 2030 target on decarbonising the power sector – to provide greater clarity and certainty for investors, and to support our future economic competitive advantage.

It is great to see the emergence of regional economic movements, too. A very interesting new example in the UK is the New Anglia Local Enterprise Partnership’s Green Economy Pathfinder – which has launched an exciting new manifesto, designed to galvanise action in the counties of Suffolk and Norfolk – deploying a route map of five key objectives, with 25 goals to achieve a sustainable and low carbon economy. It has already impressed senior EU policy makers, and it will be fascinating to see how this innovative approach delivers.

With all this activity, and as Bob Massie suggests; perhaps the new economy, and a more sustainable form of capitalism, isn’t that far away?

Towards a business manifesto?
There is no doubt that the old form of capitalism has had its day. In many ways we are now at a crossroads – and as business leaders we have a choice – do we work towards the new economy, or stick with the old.

And while not always a straightforward challenge, anybody with a penchant for hunkering down and waiting for the good times to return, I can’t see much real comfort in that direction – the great correction looks set to continue.

No. As progressive leaders, we should get brutally strategic, and honest, about the changing nature of the business landscape, and the impact this will have.

We can embrace the challenge and work through what a more responsible and sustainable form of capitalism could mean; the risks and opportunities for the business, our customers, our suppliers, and how we all make money.

In looking at the big picture, we can start developing creative solutions and new business strategies – to explore the possibilities for new markets, based on truly sustainable value.

We can adopt new models of business success, based on outcomes delivered, and real value generated and shared.

We can investigate the potential benefits of aligning with the circular economy – to optimise resources, waste and costs. And we can collaborate with others – sharing waste and resources – through industrial symbiosis strategies.

In exploring this challenge, we can find the sweet spot of green economy; new jobs, prosperity, and improved environmental impact. And not just in the clean-tech and green sectors, but right through the economy.

In recognising the drivers for more re-localised economies, we can work through the opportunities for our business operations and supply chain strategies – revitalising regions and communities, further sharing value.

New technologies can also help enable this.

Commercially, we can review our business models, and seek opportunities to take unnecessary cost out, through reducing waste and resource costs, maintaining margins, yet spending more money on people – emphasising the creation and preservation of good jobs.

We can also take the opportunity to move towards shared forms of business ownership – with a fair distribution of rewards for the people that truly enable wealth creation.

We can engage with all stakeholders – including the investment community – to help them through the transition. Our integrated business reporting approaches can help spread awareness of the long-term benefits of our holistic approaches to business.

And we can use our money wisely – moving it if necessary – to ensure we bank with and invest in appropriate organisations. This is not just an option for disenfranchised individuals – it applies to businesses, too.

Systems’ thinking applies – in spades
If we are serious about moving away from unsustainable consumption patterns, we need to recognise the consequences of doing so on our business models, and manage the transition to a more sustainable business.

This is not always easy, and will need some joined up thinking and communication across the extended enterprise.

Underpinning all of this we can establish new forms of leadership. This unprecedented combination of events means we are in completely new territory, and the ability to deal with all this needs vision and courage; to be able to look beyond the current system, beyond present-day difficulties, and to take on the real challenge of transformation; to take our businesses to a better place, another model we have not seen before.

But perhaps the simplest and most profound advice comes from Gandhi: we can be the change we want to see.

To read Part 1 in this series, click here.
To read Part 2, click here.
To read Part 3, click here.

This article was originally published on the 2degrees network

2degrees is the world’s leading business community for driving growth, efficiency and profit through sustainability.  More than just a technology platform, news site or network, 2degrees is a managed service for businesses and professionals: the most knowledgeable and active sustainable business community anywhere.
Michael Townsend is the Founder and CEO of Earthshine Solutions.  He is passionate about promoting the benefits of sustainable business, and author of The Rough Guide to Sustainable Business (forthcoming).  Michael is an engineering graduate and MBA: a business transformation leader with over twenty-five years experience in a range of sectors. Michael has developed “best in class” performance for a range of organisations, including Norwich Union (Aviva) Insurance, BAA, British Airways, Mace, The Home Office and Gazeley, amongst others.