13. If you want to see the future of American Capitalism, you'll find it today in Scandinavia.

Lane Kenworthy  "America's Social Democratic Future". Foreign Affairs.  2 April 2014.

From: http://www.foreignaffairs.com/articles/140345/lane-kenworthy/americas-social-democratic-future

(Editor's note:  This is a very long article with many detailed statistics.  I have included only the major findings, conclusions and recommendations.  For details supporting these, go to the link above.)

Obamacare has become the central battleground in an ongoing war between liberals and conservatives over the size and scope of the U.S. government, a fight whose origins stretch back to the Great Depression and the New Deal.

Opponents of President Franklin Roosevelt’s innovations were silenced when the New Deal’s reforms were locked in during the Truman and Eisenhower years, and the U.S. welfare state took another leap forward under Lyndon Johnson, whose Great Society agenda expanded public help for the poor and created the government-administered health insurance programs Medicare and Medicaid. But the following decades saw few major additions and some notable setbacks, including the failure of President Bill Clinton’s health-care reform effort in 1994.

Opponents of American-style social democracy are fighting a losing battle.  The ACA represents another step on a long, slow, but steady journey away from the classical liberal capitalist state and toward a peculiarly American version of social democracy. Unlike in, say, northern Europe, where social democracy has been enacted deliberately and comprehensively over the years by ideologically self-aware political movements, in the United States, a more modest and patchy social safety net has been pieced together by pragmatic politicians and technocrats tackling individual problems.

Powerful forces will continue to fight those efforts, and the resulting social insurance policies will emerge more gradually and be less universal, less efficient, and less effective than they would otherwise have been. But the opponents are fighting a losing battle and can only slow down and distort the final outcome rather than stop it. Thanks to a combination of popular demand, technocratic supply, and gradually increasing national wealth, social democracy is the future of the United States.

Social democracy originated in the early twentieth century as a strategy to improve capitalism rather than replace it. Today, people generally associate it with European social democratic political parties and the policies they have put in place, especially those in the Nordic countries, such as Denmark and Sweden. Over the course of the next half century, the array of social programs offered by the federal government of the United States will increasingly come to resemble the ones offered by those countries.

This prediction means something quite different today than it would have a generation ago, when the label “social democratic” referred quite narrowly to policies that made it easier for people to survive with little or no reliance on earnings from employment. In the 1960s and 1970s, the practice of social democracy mostly meant maintaining a large public safety net. Today, that’s too narrow a conception. In recent decades, the Nordic countries have supplemented their generous social programs with services aimed at boosting employment and enhancing productivity: publicly funded child care and preschool, job-training and job-placement programs, significant infrastructure projects, and government support for private-sector research and development. At the same time, the Nordic governments have adopted a market-friendly approach to regulation. Although they maintain regulations to protect workers, consumers, and the environment, they balance those protections with a system that encourages entrepreneurship and flexibility by making it easy to start or close a business, to hire or fire employees, and to adjust work hours.

As pioneered by the Nordic countries, modern social democracy means a commitment to the extensive use of government policy to promote economic security, expand opportunity, and ensure rising living standards for all. But it aims to do so while also safeguarding economic freedom, economic flexibility, and market dynamism, all of which have long been hallmarks of the U.S. economy. The Nordic countries’ experience demonstrates that a government can successfully combine economic flexibility with economic security and foster social justice without stymieing competition. Modern social democracy offers the best of both worlds.

Still, the notion that the United States is likely to further increase the size and scope of its welfare state might seem blind to the reality of contemporary American politics. But step back and consider the long run. The lesson of the past hundred years is that as the United States grows wealthier, Americans become more willing to spend more to insure against risk and enhance fairness. Advances in social policy come only intermittently, but they do come. And when they come, they usually last.

That trend is likely to continue. U.S. policymakers will recognize the benefits of a larger government role in pursuing economic security, equal opportunity, and rising living standards and will attempt to move the country in that direction. Often, they will fail. But sometimes, they will succeed. Progress will be incremental, coming in fits and starts, as it has in the past. New programs and expansions of existing ones will tend to persist, because programs that work well become popular and because the U.S. policymaking process makes it difficult for opponents of social programs to remove them. Small steps and the occasional big leap, coupled with limited backsliding, will have the cumulative effect of significantly increasing the breadth and generosity of government social programs.

Social insurance allows a modern economy to hedge against risks without relying on stifling regulations.  To understand why the United States is on the path to social democracy, one must recognize that although it is a rich country -- and in the next half century, it will grow even richer -- it nevertheless suffers from serious economic failings. These are deep-seated problems; although exacerbated by the Great Recession and the feeble recovery, they predate the country’s recent economic troubles.

First, the United States does not ensure enough economic security for its citizens. Second, the country is failing in its promise of equal opportunity. Third, too few Americans have shared in the prosperity their country has enjoyed in recent decades.

These failures owe in part to changes in the global economy, especially the increasing competition faced by U.S. firms. American companies selling goods or services in international markets confront foreign rivals that are far more capable than in the past. Domestic industries face more competition, too, as technological advances, falling construction and transportation costs, and deregulation have reduced barriers to entry. In addition, shareholders now want rapid appreciation in stock values. Whereas a generation ago, investors in a company were happy with a consistent dividend payment and some long-term increase in the firm’s stock price, they now demand buoyant quarterly profits and constant growth.

These shifts benefit investors, consumers, and some employees. But they encourage companies to resist pay increases, drop health insurance plans, cut contributions to employee pensions, move abroad, downsize, and replace regular employees with temporary ones -- or computers. Such cost-cutting strategies end up weakening economic security, limiting opportunities for low-skilled labor, and reducing income growth for many ordinary Americans -- trends that are certain to continue into the foreseeable future. In the coming decades, more Americans will lose a job, work for long stretches without a pay increase, work part time or irregular hours, and go without an employer-backed pension plan or health insurance.

Some believe that the best way to address the stresses and strains of the new economy is to strengthen families, civic organizations, or labor unions. Those are laudable aims. But these institutions have been unraveling over the past half century, and although advocates of revitalizing them offer lots of hope, they can point to little evidence of success.

An influential faction in Washington favors a different solution: shrink the federal government. According to this view, reducing taxes and government spending will improve efficiency, limit waste, and enhance incentives for investment, entrepreneurship, and hard work, leading to faster economic growth. But this approach is predicated on the false notion that the growth of government limits the growth of the private sector. Over the course of the past century, the United States has gradually expanded government spending, from 12 percent of GDP in 1920 to 37 percent in 2007. Throughout that period, the country’s growth rate remained remarkably steady. Other evidence comes from abroad: among the world’s rich nations, those with higher taxes and government expenditures have tended to grow just as rapidly as those with smaller governments. Moreover, even if cutting taxes and reducing federal spending did produce faster growth, the record of the past few decades suggests that too little of that growth would benefit Americans in the middle and below.

Most of what social scientists call “social policy” is actually public insurance. Social Security and Medicare insure individuals against the risk of having little or no money after they retire. Unemployment compensation insures individuals against the risk of losing their jobs. Disability payment programs insure against the risk of individuals’ suffering physical, mental, or psychological conditions that render them unable to earn a living.

Other U.S. public services and benefits are also insurance programs, even if people don’t usually think of them that way. Public schools insure against the risk that private schools will be unavailable, too expensive, or of low quality. Retraining and job-placement programs insure against the risk that market conditions will make it difficult to find employment. The Earned Income Tax Credit insures against the risk that one’s job will pay less than what is necessary for a minimally decent standard of living. Social assistance programs, such as food stamps and Temporary Assistance for Needy Families, insure against the risk of being unable to get a job but ineligible for unemployment or disability compensation.

Over the past century, the United States, like other rich nations, has created a number of public insurance programs. But to achieve genuine economic security, equal opportunity, and shared prosperity in the new economy, over the course of the next half century, the federal government will need to greatly expand the range and scope of its existing social insurance programs and introduce new programs.

Of course, spending on insurance comes at a price. Americans will need to pay more in taxes. Moreover, the existence of insurance increases the incentive for people to engage in risky behavior or to avoid employment. However, insurance also has economic benefits. Better education and health care improve productivity. Bankruptcy protection encourages entrepreneurship. Unemployment compensation encourages a more mobile work force and makes it easier for workers to improve their skills. Programs such as the Child Tax Credit and the Earned Income Tax Credit enhance the educational and economic prospects of children who grow up in poor households. And, crucially, social insurance allows a modern economy to hedge against risks without relying on stifling regulations that specify what businesses can and cannot do.

The experience of the world’s rich countries over the past century should allay the fear that growth in the size and scope of public social programs will weaken the U.S. economy. There surely is a level beyond which public social spending hurts economic growth. But the evidence indicates that the United States has not yet reached that level. In fact, the country is probably still well below it.

Some observers, even many on the left, worry about the applicability of Nordic-style policies -- which have succeeded in the context of small, relatively homogeneous countries -- to a large, diverse nation such as the United States. Yet moving toward social democracy in the United States would mostly mean asking the federal government to do more of what it already does. It would not require shifting to a qualitatively different social contract.

But can the United States afford social democracy? As a technical matter, revising the U.S. tax code to raise the additional funds would be relatively simple. The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT), which the government would levy on goods and services at each stage of their production and distribution. Analyses by Robert Barro, Alan Krueger, and other economists suggest that a VAT at a rate of 12 percent, with limited exemptions, would likely bring in about five percent of GDP in revenue -- half the amount required to fund the expansions in social insurance proposed here.

A mix of other changes to the tax system could generate an additional five percent of GDP in tax revenues: a return to the federal income tax rates that applied prior to the administration of President George W. Bush, an increase of the average effective federal tax rate for the top one percent of taxpayers to about 37 percent, an end to the tax deduction for interest paid on mortgage loans, new taxes on carbon dioxide emissions and financial transactions, an increase in the cap on earnings that are subject to the Social Security payroll tax, and a one percent increase in the payroll tax rate.

These kinds of tax reforms and the social insurance programs they would fund will not arrive all at once. It will be a slow process, partly owing to a series of obstacles that social democratic ideas are sure to face. But none of the barriers is likely to prove insurmountable.

Another potential roadblock is the rightward shift in the balance of power among organized interests outside the electoral arena, which exert substantial influence on policymaking. Since the 1970s, businesses and affluent individuals have mobilized, while the labor movement has steadily declined in membership. Yet this shift has managed to only slow, not stop, the advance of progressive social policy.

A final potential obstacle to American social democracy is the structure of the U.S. political system, in which it is relatively easy to block policy changes through congressional maneuvering or effective vetoes. Given this structure, the kind of disciplined obstructionism demonstrated by congressional Republicans during Obama’s tenure would surely threaten the forward march of public insurance. Sooner or later, however, Republican leaders will turn away from the staunch anti-government orientation that has shaped the party’s strategy and tactics in recent years. In the long run, the center of gravity in the Republican Party will shift, and the GOP will come to resemble center-right parties in western Europe, most of which accept a generous welfare state and relatively high taxes.

Three things could potentially trigger such a shift. One is a loss by a very conservative Republican candidate in an otherwise winnable presidential election. If the party were to nominate a member of its far-right or libertarian faction in 2016 or 2020, that candidate would almost certainly lose, which would prompt a move back toward the center. Another factor favoring Republican moderation is the growing importance to the party of working-class whites.

Perhaps most important, clear thinkers on the right will eventually realize that given Americans’ desire for economic security and fairness, the question is not whether the government should intervene but how it should do so. An expansion of social programs would not necessarily mean more government interference in markets and weaker competition. Here again, the Nordic countries can show the way. The conservative Heritage Foundation collaborates with The Wall Street Journal in a project that grades countries on ten dimensions of economic freedom. Although the United States has lower taxes and lower government spending than the Nordic countries, Denmark, Finland, and Sweden score better, on average, on the other eight measures, including the right to establish and run an enterprise without interference from the state, the number of regulatory barriers to imports and exports, and the number of restrictions on the movement of capital. Americans want protection and support. To deliver those things, policymakers must choose between public insurance and regulation, and conservatives ought to prefer the former.

Perhaps what is most important to note about the United States’ social democratic future is that it will not look dramatically different from the present day. The United States will not become a progressive utopia; rather, it will become a better version of its current self.  A larger share of adults will be employed, although for many, the workweek will be shorter and there will be more vacation days and holidays. Nearly all jobs will be in the service sector, especially teaching, advising, instructing, organizing, aiding, nursing, monitoring, and transporting; only around five percent will be in manufacturing or agriculture. Most Americans will change jobs and even careers more frequently than they do today. More Americans will work in jobs with low pay, will lose a job more than once during their careers, and will reach retirement age with little savings. Families, community organizations, and labor unions might grow even weaker than they are now.

But by filling in the gaps in the public safety net, the federal government will improve economic security, equal opportunity, and shared prosperity for most Americans in spite of these changes. A social democratic America will be a society with greater economic security and fairness. Its economy will be flexible, dynamic, and innovative. Employment will be high. Liberty will be abundant. Balancing work and family will be easier. Americans will pay higher taxes than they currently do, but the sacrifice will be worth it, because they will receive a lot in return.

The United States has come a long way on the road to becoming a good society, but it still has further to travel. Happily, its history and the experiences of other rich nations show the way forward. One reason the United States is a much better country today than it was a century ago is that the federal government does more to ensure economic security, equal opportunity, and shared prosperity. In the future, it will do more still, and the country will be better for it.

12. We are not practicing real Capitalism, the world we live in is controlled by Corporate Statism.

From:  http://rwer.wordpress.com/2014/05/01/the-enlightened-capitalist/

The world is rapidly changing, and not for the better. First, the liberal economic model is now being questioned. The global financial crisis and the Great Recession have revealed not only that the market is not self-correcting, but also that policymakers might be unable to fix what markets have broken. Second, the material outlook for much of humanity remains dim. Despite the victory of capitalism over communism, large segments of the world’s population live in utter poverty, with little prospect for change, while many of the so-called middle classes, particularly the younger generations, are threatened by chronic unemployment and dead-end jobs. And third, capitalism seems to be destabilizing the natural environment. Pollution is intensifying, habitats are being destroyed, resources are being depleted, and the overall climate might be changing, possibly for the worse.

And yet, despite this triple calamity – or perhaps because of it – the upward redistribution of income and assets continues unabated. While much of the world’s population is stuck in the doldrums, dominant capital seems to be growing ever more powerful. The leading capitalists and their investment organs are taking over larger and larger chunks of our natural resources, human-made artifacts and collective knowledge; they formulate and steer public policy to their own advantage; and they dominate ideology, education and the mass media.

Some capitalists, particularly the bigger ones, are beginning to fear that this divergence is untenable. They realize that if this sabotage-led redistribution continues, something will have to give; and when that happens, they might find themselves heading for the hills.

As a class, though, capitalists are unable to do much about this systemic risk. First, no ruling class voluntarily gives up its power, particularly not at the hubris stage, when that power seems unassailable. Second, the very power logic of accumulation – the need to strategically sabotage others in order to increase one’s own share of the total – forces capitalists to continue and dig their own graves, so to speak.

The world we live in isn’t capitalistic at all. It is statist.  Real capitalism has no distorting entities. It has no government, no central bank, no judicial system, no courts, no police and no jails. It has no army, no ideology, no public education or public transportation. It has no paper money, no enforced units of measure and probably no common language. It also has no corporate coalitions, labour unions and NGOs. And, as educators, it is our duty to present this true vision of capitalism to our students. Otherwise, they might end up confusing the world around them for reality.

The original state of nature. Now, once upon a time there existed a real, undistorted capitalist system as outlined above. In this true system, money was weighed in gold and the price of a commodity reflected its true value. Regrettably, though, true capitalism no longer exists. Somewhere along the way, and for totally exogenous reasons, it gave way to a distorted statist system. In this new system, money is monopolized by the government and private banks. Together, they create private credit out of thin air and then force the rest of us to use this credit as if it were ‘real money’.

Unlike true capitalism, distorted statism is manifestly unfair. Statism favours large corporations, which in turn influence governments and the banks to give them cheap credit – while at the same time screwing the ‘unconnected’ little guy. The situation is particularly bad during crises, when the banks don’t create enough credit for everyone. Now, to repeat, this setup has absolutely nothing to do with true capitalism. In fact, and here you might want to hold onto your seat, the executives and owners of firms that rely on the government – i.e., the S&P 500– are not capitalists at all!

There is no denying that, for the past 70 years, the U.S. rate of unemployment and the domestic income share of capital were positively and very tightly correlated (Figure 1); and it is equally true that, over the past 90 years, the income share of the Top 1% and the growth rate of employment were negatively correlated (Figure 2). Moreover, these facts make perfect sense – they show how statist policymakers and central bankers skew, distort and undermine the system in favour of their big-business buddies. But then remember that none of this is related in any way to real capitalism, real capital, and real capitalists.

Saving the planet. To see real capitalists in action, you need go to their ‘impact investing’ gatherings, where they deliberate saving the world, capitalist style. In these conventions – which unfortunately have to host detested government officials who subsidize the proceedings, as well as confused academic economists and token civil-society representatives – the discussion focuses exclusively on the world’s gravest problems (caused, no doubt, by government distortions, market imperfections and assorted externalities). The mood in these conferences is happily collective. The goal is usually practical: to come up with ‘business ideas’ and ‘market solutions’ that ‘actually work’ (needless to say, non-business/non-market platforms are viewed with great suspicion, while anti-business and anti-market ideas are rarely if ever allowed in the door). In this context, there is obviously no need to speak about ‘beating the average’ and certainly not about ‘gaining power over others’.

Outperforming. However, when the conference is over and the participants return to their offices, the imperatives of accumulation take over. Unlike the collective/cooperative language of the convention hall, here the parameters are entirely differential and totally unsentimental. Whether it ends up saving the world or not, the key imperative here is to outperform. So in the end, the only way to beat the big unreal capitalists of the distorted world is to joint them. Just don’t tell anyone, or there will be blood.

11. Unilever seems like an enlightened corporation. Is it an unusual exception or a growing trend?

Business, society, and the future of capitalism

McKinsey & Company – May 2014

Unilever chief executive Paul Polman explains why capitalism must evolve, his company’s efforts to change, and how business leaders are critical to solving intractable problems.

Capitalism has served us enormously well. Yet while it has helped to reduce global poverty and expand access to health care and education, it has come at an enormous cost: unsustainable levels of public and private debt, excessive consumerism, and, frankly, too many people who are left behind. Any system that prevents large numbers of people from fully participating or excludes them altogether will ultimately be rejected. And that’s what you see happening. People are asking, “What are we doing here? The amount of resources we currently use is 1.5 times the world’s resource capacity. Is that sustainable? A billion people still go to bed hungry. Is that sustainable? The richest 85 people have the same wealth as the bottom 3.5 billion. Is that sustainable?” Digitization and the Internet have given consumers enormous abilities to connect and aggregate their voices. Power is dispersed, but wealth is concentrated. Further development and population growth will put a lot more pressure on our planet.

Capitalism needs to evolve, and that requires different types of leaders from what we’ve had before. Not better leaders, because every period has its own challenges, but leaders who are able to cope with today’s challenges (see sidebar, “From the archives: The social role of the world enterprise”). Most of the leadership skills we talk about—integrity, humility, intelligence, hard work—will always be there. But some skills are becoming more important, such as the ability to focus on the long term, to be purpose driven, to think systemically, and to work much more transparently and effectively in partnerships. There are enormous challenges, but business leaders thrive on them and are well placed to solve them, as they also offer enormous opportunities. I often say it’s too late to be a pessimist.

The new corporation

Business is here to serve society. We need to find a way to do so in a sustainable and more equitable way not only with resources but also with business models that are sustainable and generate reasonable returns. Take the issues of small hold farming, food security, and deforestation. They often require ten-year plans to address. But if you’re in a company like ours and you don’t tackle these issues, you’ll end up not being in business. We need to be part of the solution. Business simply can’t be a bystander in a system that gives it life in the first place. We have to take responsibility, and that requires more long-term thinking about our business model.

In our effort to achieve that at Unilever, we first looked inward. We actually had a ten-year period of no growth, and that forces you to make your numbers or you’re under pressure from your shareholders. You end up underinvesting in IT systems and training your people; your capital base erodes. And bit by bit, you become internally focused, think in the shorter term, and undertake activities that don’t create long-term value. So how do you change that?

The first thing is mind-set. When I became chief executive, in 2009, I said, “We’re going to double our turnover.” People hadn’t heard that message for a long time, and it helped them get back what I call their “growth mind-set.” You simply cannot save your way to prosperity. The second thing was about the way we should grow. We made it very clear that we needed to think differently about the use of resources and to develop a more inclusive growth model. So we created the Unilever Sustainable Living Plan, which basically says that we will double our turnover, reduce our absolute environmental impact, and increase our positive social impact. Because it takes a longer-term model to address these issues, I decided we wouldn’t give guidance anymore and would stop full reporting on a quarterly basis; we needed to remove the temptation to work only toward the next set of numbers.

Our share price went down 8 percent when we announced the ending of guidance, as many saw this as a precursor to more bad news. But that didn’t bother me too much; my stance was that in the longer term, the company’s true performance would be reflected in the share price anyway. Our final internal change was to alter the compensation system to bring in some incentives related to the long term. Ultimately, a year or so was needed to make it very clear internally that we were focused on the long term, on sustainable growth. To reinforce that message externally we focused our effort more on attracting the right longer-term shareholders to our share register.

The benefits of long-term thinking

Thinking in the long term has removed enormous shackles from our organization. I really believe that’s part of the strong success we’ve seen over the past five years. Better decisions are being made. We don’t have discussions about whether to postpone the launch of a brand by a month or two or not to invest capital, even if investing is the right thing to do, because of quarterly commitments. We have moved to a more mature dialogue with our investor base about what strategic actions serve Unilever’s best interests in the long term versus explaining short-term movements.  That’s very motivational for our employees. We may not pay the same salaries as the financial sector, but our employee engagement and motivation have gone up enormously over the past four or five years. People are proud to work on something where they actually make a difference in life, and that is obviously the hallmark of a purpose-driven business model. We’re getting more energy out of the organization, and that willingness to go the extra mile often makes the difference between a good company and a great one.

Let me be clear, though: a longer-term growth model doesn’t mean underperforming in the short term. It absolutely doesn’t need to involve compromises. If I say we have a ten-year plan, that doesn’t mean “trust us and come back in ten years.” It means delivering proof every year that we’re making progress. We still have time-bound targets and hold people strictly accountable for them, but they are longer than quarterly targets. Often they require investments for one or two years before you see any return. For instance, one of our targets is creating new jobs for 500,000 additional small farmers. We had 1.5 million small farmers who directly depended on us, and we’ve already added about 200,000 more to that group. It’s a long-term goal, but we still hold people accountable. The same is true for moving to sustainable sourcing or reaching millions with our efforts to improve their health and well-being. All of this is hardwired to our brands and all our growth drivers.

Convincing investors

When we reported on a quarterly basis, we often saw enormous volatility in our share price, which attracted short-term speculators. By abolishing full quarterly reporting of the P&L, we took some of the volatility out. But moving to a longer-term focus required spending significant time reaching out to the right shareholders. Any company—certainly a company of our size—has thousands if not millions of shareholders, and they can have different objectives. Some want you to spin off businesses and get a quick return. Some want share buybacks, some want dividend increases, some want you to grow faster. It’s very difficult to run a company if you try to meet the needs of all your shareholders. So we spent time identifying those we thought would feel comfortable with our longer-term growth model instead of catering to shorter-term interests.

We have seen our shareholder base shift. That’s probably not happening as fast as we would have liked, but we are starting to see change as our results come in more consistently and we can provide more proof: several years of consistent top- and bottom-line progress, many years of consistent dividend increases, and so on. We’re starting to attract more longer-term thinkers, who are sufficiently numerous to satisfy our business model. It’s the same thing with consumers. Which consumers are you seeking? You cannot appeal to all of them; you decide which ones you want and then target those. Why not apply that same principle to your shareholder base? It’s not only corporate leaders who need to take a longer-term view of capitalism. Pension funds own 75 percent of the capital on US stock exchanges, representing companies like ours. These funds are actually there to guarantee longer-term returns for all of us when we eventually retire.

They firmly believe in that mission, but many of them have activity systems that do not support it. They might offer quarterly incentives to their fund managers; they might employ short-term hedge funds and others, disturbing the normal economic process. It is increasingly clear now that a lot of this activity actually destroys more value than it builds. A fund manager, like a company, needs to think, “How can I stimulate the right behavior? How can I have a more mature discussion? How can we look at other drivers so that we see we’ve got a model for longer-term returns?” I think we will all end up being in a better position than we otherwise would. At Unilever, we’ve looked at our own pension fund, with $17 billion of assets, and questioned whether it was invested according to our views on long-term capitalism. We are seeking to adhere to the responsible-investment principles that the UN Global Compact is championing. We have also issued our first “green bond” in consumer goods to galvanize change in the financial markets. We are talking to the growing group of high-net-worth individuals about putting their money to good use. More people are becoming more amenable to the argument than would have in the past.

A new business model

In the coming 15 years, we need to align on the new Millennium Development Goals.  We have a unique opportunity to create a world that can eradicate poverty in a more sustainable and equitable way. That is very motivational. Business needs to be part of it. Corporate social responsibility and philanthropy are very important, and I certainly don’t want to belittle them. But if you want to exist as a company in the future, you have to go beyond that. You actually have to make a positive contribution. Business needs to step up to the plate. Although some people might not like business or fail to understand that it needs to make a profit, they do understand that it has to play a key role in driving solutions. In the next ten years, I think you are going to see many more initiatives undertaken by groups of businesses to protect their long-term interests and the long-term interests of society. Governments will join these initiatives if they see business committed. It is, however, becoming more difficult for governments to initiate such projects in the current political environment as long as we don’t adjust our outdated governance model.

The Tropical Forest Alliance is a good example of what can be done. If we keep going with deforestation, which accounts for 15 percent of global warming, our business model and, frankly, our whole society are at risk. On top of that, the consumer is saying, “I’m not going to buy products anymore created through deforestation.” So industry got together and said that we need to use combined scale and impact to create a tipping point. The Consumer Goods Forum (representing $3 trillion in retail sales), which we helped to create, is one of these coalitions of the biggest manufacturers and retailers. When they said, “By 2020, we’re not going to sell any more products from illegal deforestation, whether soy, beef, pulp, paper, or palm oil,” that sent an enormous signal across the total value chain and generated action on the supplier side. Governments are now joining.

We’re actually close to a tipping point to address these issues. That is the new world we have to learn to live in.

10. Whoa! If, historically, many Corporations have shown behaviors similar to those of Psychopaths, is there any hope for a kinder, gentler Capitalism in the future?

From Wikipedia: The Corporation is a 2003 Canadian documentary film written by University of British Columbia law professor Joel Bakan, and directed by Mark Achbar and Jennifer Abbott. The documentary examines the modern-day corporation.

The Corporation attempts to compare the way corporations are systematically compelled to behave with what it claims are the DSM-IV '​s symptoms of psychopathy, e.g.,

• the callous disregard for the feelings of other people,
• the incapacity to maintain human relationships,
• the reckless disregard for the safety of others,
• the deceitfulness (continual lying to deceive for profit),
• the incapacity to experience guilt,
• and the failure to conform to social norms and respect the law. 

However, the DSM has never included a psychopathy diagnosis, rather the DSM-IV proposes antisocial personality disorder (ASPD). ASPD and psychopathy, while sharing some diagnostic criteria, are not synonymous.

The film was nominated for over 26 international awards.[citation needed] It won the World Cinema Audience Award: Documentary at the Sundance Film Festival, 2004, along with a Special Jury Award at the International Documentary Film Festival Amsterdam (IDFA) in 2003[citation needed] and 2004.

Film critics gave the film generally favorable reviews. The review aggregator Rotten Tomatoes reported that 91% of critics gave the film positive reviews, based on 104 reviews.[3] Metacritic reported the film had an average score of 73 out of 100, based on 28 reviews.[4]

In Variety (October 1, 2003), Dennis Harvey praised the film's "surprisingly cogent, entertaining, even rabble-rousing indictment of perhaps the most influential institutional model for our era" and its avoidance of "a sense of excessively partisan rhetoric" by deploying a wide range of interviewees and "a bold organizational scheme that lets focus jump around in interconnective, humorous, hit-and-run fashion."[5]

In the Chicago Sun-Times (July 16, 2004), Roger Ebert described the film as "an impassioned polemic, filled with information sure to break up any dinner-table conversation," but felt that "at 145 minutes, it overstays its welcome. The wise documentarian should treat film stock as a non-renewable commodity."[6]

The Economist review, while calling the film "a surprisingly rational and coherent attack on capitalism's most important institution" and "a thought-provoking account of the firm", calls it incomplete. It suggests that the idea for an organization as a psychopathic entity originated with Max Weber, in regards to government bureaucracy. The reviewer remarks that the film weighs heavily in favor of public ownership as a solution to the evils depicted, while failing to acknowledge the magnitude of evils committed by governments in the name of public ownership, such as those of the Communist Party in the former Soviet Union[7] or by monarchies and the Church. The Maoist Internationalist Movement, in their review criticizes the film for the opposite: for depicting the communist party in an unfavourable light, while adopting an anarchist approach favoring direct democracy and worker's councils without emphasizing the need for a centralized bureaucracy.[8]

An op-ed in the Canadian magazine Western Standard reported that the film was "pummeled by experts for getting basic economic facts wrong."[9]

An interview clip with psychiatrist Robert D. Hare appears for several minutes in The Corporation. A pioneer in psychopathy research whose Hare Psychopathy Checklist is used in part to "diagnose" purportedly psychopathic behavior of corporations in the documentary, Hare has since objected to the manner in which his work was presented in the film and the use of his work to bolster what he describes as the film's questionable thesis and conclusions. In Snakes in Suits: When Psychopaths Go to Work (2007; co-written with Paul Babiak), Hare wrote that despite claims by the filmmakers to him during production that they were using psychopathy metaphorically to describe "the most egregious" corporate misbehavior, the finished documentary obviously intends to imply that corporations in general or by definition are psychopathic, a claim that Hare emphatically rejects:

To refer to the corporation as psychopathic because of the behaviors of a carefully selected group of companies is like using the traits and behaviors of the most serious high-risk criminals to conclude that the criminal (that is, all criminals) is a psychopath. If [common diagnostic criteria] were applied to a random set of corporations, some might apply for the diagnosis of psychopathy, but most would not.[10]

However, in his monologue in The Corporation and the transcript with added comments, Hare, in addition to pointing out differences between corporations, clearly uses generalized terms such as "tend", "most", "almost", "routinely", "much the same", "almost by their very nature", and "by definition" with regard to numerous of his characterizations of psychopathy applying to corporations.[11] Nonetheless, Hare insists that his guarded, qualified comments on the "academic exercise" of diagnosing certain corporations as psychopathic was used in support of a larger thesis that he was not informed in advance about and with which he did not agree.

9. Who says a kinder, gentler Capitalism is not possible?

Has the B Corp Movement Made a Difference? - A look at the progress of the B Corporation movement to date.

Stanford Social Innovation Review - Ryan Honeyman Oct. 13, 2014

http://www.ssireview.org/blog/entry/has_the_b_corp_movement_made_a_difference

The B Corporation movement has come a long way since the founding of B Lab (the nonprofit behind the B Corps) in 2007. Well-known companies such as Ben & Jerry’s, Dansko, Etsy, Method, New Belgium Brewery, Patagonia, Plum Organics, and Seventh Generation are just a few of the more than 1,100 Certified B Corporations (distinct from benefit corporations) now established across 80 industries and 35 countries, including Afghanistan, Australia, Brazil, Chile, Kenya, and Mongolia.

Inc. magazine has called B Corp certification “the highest standard for socially responsible businesses”; the New York Times has said, “B Corp provides what is lacking elsewhere: proof”; and thought leaders have expressed great interest:

“You ought to look at these B Corporations, ... We’ve got to get back to a society that doesn’t give one class of stakeholders an inordinate advantage over others.”—Bill Clinton, former president of the United States

Gnapa

“I think B Corporations will make more profits than other types of companies.”—Robert Shiller, 2013 Nobel laureate in Economics

“B Corporations are a way to transcend the contradictions between the ineffective parts of the social sector and myopic capitalism.”—David Brooks, columnist

But apart from all of the praise and promise, the question remains: Has the B Corp movement made a difference? In particular, has it helped companies create more social, environmental, and financial value?

I believe it has—particularly in the following five areas:

Attracting talent and engaging employees. Becoming a Certified B Corporation can unleash the passion, initiative, and imagination of employees by connecting them with the larger purpose behind their work. Ryan Martens, founder and CTO of Rally Software (the first publicly traded Certified B Corporation) says that certification has made a “huge difference” to Rally’s 530 employees: “Our B Corp certification gives us a way to differentiate ourselves from Google or the latest tech startup in a marketplace that has negative unemployment.”

Increasing consumer trust. Consumers increasingly assert that they do not want to buy a green product from a company that has a poor overall social and environmental record. They want to know what kind of company stands behind the product or service they want to buy. Many B Corporations have said that certification has helped them build a deeper, more loyal fan base. For example, Neil Grimmer, cofounder and CEO of Plum Organics, says, “B Corp certification—and the rigorous standards and third-party verification that the logo represents—helps us communicate our story, our mission, and our values in a way that our consumers understand and can trust.”

Benchmarking and improving performance. One of the most useful tools created by B Lab is the B Impact Assessment, a free tool that measures the social and environmental performance of an entire company on a scale of 0 to 200 points. Jostein Solheim, CEO of Ben & Jerry’s, explains that the assessment has helped the company take its performance to another level, saying, “The B Impact Assessment helps us measure, compare, and optimize multiple variables in order to deliver a better result for society and the environment.”

Protecting a company’s mission for the long term. One of the primary challenges that the benefit corporation (distinct from B Corporations) was created to address is the difficulty that many entrepreneurs have in raising capital, growing, or selling their business without diluting the company’s original social and environmental values. By incorporating as a benefit corporation, entrepreneurs can help protect their mission by elevating their company’s core social and environmental values to the status of law. “The benefit corporation legal structure allowed me to have a conversation with my investors about social, environmental, and financial value,” says Adam Lowry, cofounder of Method. “It forces a discussion with shareholders who may have a spectrum of opinions about the role of your social and environmental mission.”

Building collective voice: Many movements—including clean tech, microfinance, and sustainable agriculture, as well as Buy Local and co-ops—are manifestations of the same idea: how to use business for good. The B Corporation amplifies the voice of this diverse marketplace through the power of a unifying brand. “When I was helping large companies with sustainability 20 years ago, the advice and support was much more piecemeal, “ says Dave Stangis, vice president of public affairs and corporate responsibility at Campbell Soup Company. “The B Corporation provides a symbol for businesses, employees, the media, community members, and environmental groups to rally around.”

So what does success for the B Corp movement look like?

In a very short amount of time, the B Corporation movement has brought together a global community of innovative, passionate, and forward-thinking business leaders who are committed to solving some of the world’s greatest social and environmental challenges. But while Marc Gunther, editor at large Guardian Sustainable Business, believes that B Lab’s accomplishments over the past seven years are very impressive and deserve praise, he says, “I’m not sure that many Fortune 500 executives are talking about B Corporations.”

Gunther touches on a point that many in the B Corp movement have realized: Success for the movement is not necessarily rapid growth in the number of Certified B Corporations. Even if there were 100,000 Certified B Corps, they would represent only a small percentage of the total number of businesses worldwide.

A more valuable measurement of success, and perhaps the true legacy of the B Corp movement, would be a dramatic increase in the number of businesses that measure what matters—social and environmental performance, in addition to financial performance—by using credible, whole-business benchmarking tools such as the B Impact Assessment. When businesses measure the effects of their operations on all of their stakeholders, compare themselves with their industry peers, and start to compete to be the best for the world rather than just the best in the world, we will be making progress toward a shared and durable prosperity for all.

8. To heal Capitalism, change the investment strategy of big, institutional investors - pension funds, insurance firms, sovereign wealth funds, and mutual funds

Focusing Capital on the Long Term by Dominic Barton Mark Wiseman

Harvard Business Review – January 2014 Issue

(Editor's note: this is a rather long piece with many examples for those interested in details.  For the bottom line, go to the last paragraph.)

Since the 2008 financial crisis and the onset of the Great Recession, a growing chorus of voices has urged the United States and other economies to move away from their focus on “quarterly capitalism” and toward a true long-term mind-set. This topic is routinely on the meeting agendas of the OECD, the World Economic Forum, the G30, and other international bodies. A host of solutions have been offered—from “shared value” to “sustainable capitalism” —that spell out in detail the societal benefits of such a shift in the way corporate executives lead and invest. Yet despite this proliferation of thoughtful frameworks, the shadow of short-termism has continued to advance—and the situation may actually be getting worse. As a result, companies are less able to invest and build value for the long term, undermining broad economic growth and lowering returns on investment for savers.

The main source of the problem, we believe, is the continuing pressure on public companies from financial markets to maximize short-term results. And although some executives have managed to ignore this pressure, it’s unrealistic to expect corporate leaders to do so over time without stronger support from investors themselves. A crucial breakthrough would occur if the major players in the market, particularly the big asset owners, joined the fight—something we believe is in the best interests of their constituents. In this article we lay out some practical approaches that large institutional investors can take to do this—many of which are already being applied by a handful of major asset owners.

The Intensifying Pressure for Short-Term Results

One of us (Dominic Barton) previously wrote about the need to “fight the tyranny of short-termism” (see “Capitalism for the Long Term,” HBR March 2011), and over the past few years both our organizations have been monitoring the debate on short-termism. Early in 2013 McKinsey and the Canada Pension Plan Investment Board (CPPIB) conducted a McKinsey Quarterly survey of more than 1,000 board members and C-suite executives around the world to assess their progress in taking a longer-term approach to running their companies. The results are stark:

• ·       63% of respondents said the pressure to generate strong short-term results had increased over the previous five years.
• ·       79% felt especially pressured to demonstrate strong financial performance over a period of just two years or less.
• ·       44% said they use a time horizon of less than three years in setting strategy.
• ·       73% said they should use a time horizon of more than three years.
• ·       86% declared that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation.

What explains this persistent gap between knowing the right thing to do and actually doing it? In our survey, 46% of respondents said that the pressure to deliver strong short-term financial performance stemmed from their boards—they expected their companies to generate greater earnings in the near term. As for those board members, they made it clear that they were often just channeling increased short-term pressures from investors, including institutional shareholders.

That’s why we have concluded that the single most realistic and effective way to move forward is to change the investment strategies and approaches of the players who form the cornerstone of our capitalist system: the big asset owners.

Practical Changes for Asset Owners

The world’s largest asset owners include pension funds, insurance firms, sovereign wealth funds, and mutual funds (which collect individual investors’ money directly or through products like 401(k) plans). They invest on behalf of long-term savers, taxpayers, and investors. In many cases their fiduciary responsibilities to their clients stretch over generations. Today they own 73% of the top 1,000 companies in the U.S., versus 47% in 1973. So they should have both the scale and the time horizon to focus capital on the long term.But too many of these major players are not taking a long-term approach in public markets. They are failing to engage with corporate leaders to shape the company’s long-range course. They are using short-term investment strategies designed to track closely with benchmark indexes like the MSCI World Index. And they are letting their investment consultants pick external asset managers who focus mostly on short-term returns. To put it bluntly, they are not acting like owners.The result has been that asset managers with a short-term focus are increasingly setting prices in public markets. They take a narrow view of a stock’s value that is unlikely to lead to efficient pricing and collectively leads to herd behavior, excess volatility, and bubbles. 

This, in turn, results in corporate boards and management making suboptimal decisions for creating long-term value. Work by Andrew Haldane and Richard Davies at the Bank of England has shown that stock prices in the United Kingdom and the United States have historically overdiscounted future returns by 5% to 10%. Avoiding that pressure is one reason why private equity firms buy publicly traded companies and take them private. Research, including an analysis by CPPIB, which one of us (Mark Wiseman) heads, indicates that over the long term (and after adjustment for leverage and other factors), investing in private equity rather than comparable public securities yields annual aggregate returns that are 1.5% to 2.0% higher, even after substantial fees and carried interest are paid to private equity firms. Hence, the underlying outperformance of the private companies is clearly higher still.

Simply put, short-termism is undermining the ability of companies to invest and grow, and those missed investments, in turn, have far-reaching consequences, including slower GDP growth, higher unemployment, and lower return on investment for savers. To reverse this destructive trend, we suggest four practical approaches for institutional investors serious about focusing more capital on the long term.

1. Invest the portfolio after defining long-term objectives and risk appetite.

Many asset owners will tell you they have a long-term perspective. Yet rarely does this philosophy permeate all the way down to individual investment decisions. To change that, the asset owner’s board and CEO should start by defining exactly what they mean by long-term investing and what practical consequences they intend. The definition needs to include a multiyear time horizon for value creation. For example, Berkshire Hathaway uses the rolling five-year performance of the S&P 500 as its benchmark to signal its longer-term perspective.

Just as important as the time horizon is the appetite for risk. How much downside potential can the asset owner tolerate over the entire time horizon? And how much variation from the benchmark is acceptable over shorter periods? Short-term underperformance should be tolerated—indeed, it is expected—if it helps achieve greater long-term value creation.

Singapore’s sovereign wealth fund, GIC, takes this approach while maintaining a publicly stated 20-year horizon for value creation. The company has deliberately pursued opportunities in the relatively volatile Asian emerging markets because it believes they offer superior long-term growth potential. Since the mid-2000s GIC has placed up to one-third of its investments in a range of public and private companies in those markets. This has meant that during developed-market booms, its equity holdings have underperformed global equity indexes. While the board looks carefully at the reasons for those results, it tolerates such underperformance within an established risk appetite.

Next, management needs to ensure that the portfolio is actually invested in line with its stated time horizon and risk objectives. This will likely require allocating more capital to illiquid or “real” asset classes like infrastructure and real estate. It may also mean giving much more weight to strategies within a given asset class that focus on long-term value creation, such as “intrinsic-value-based” public-equity strategies, rather than momentum-based ones. Since its inception in 1990, the Ontario Teachers’ Pension Plan (OTPP) has been a leader in allocating capital to illiquid long-term asset classes as well as making direct investments in companies. Today real assets such as water utilities and retail and office buildings account for 23% of OTPP’s portfolio. Another believer in this approach is the Yale University endowment fund, which began a self-proclaimed “revolutionary shift” to nontraditional asset classes in the late 1980s. Today the fund has just over 35% in private equity and 22% in real estate.

Finally, asset owners need to make sure that both their internal investment professionals and their external fund managers are committed to this long-term investment horizon. Common compensation structures like a 2% management fee per year and a 20% performance fee do little to reward fund managers for long-term investing skill. A recent Ernst & Young survey found that although asset owners reported wanting annual cash payments to make up only 38% of fund managers’ compensation (with equity shares, deferred cash, stock options, and other forms of compensation accounting for the rest), in practice they make up 74%. While many institutions have focused on reducing fixed management fees over the past decade, they now need to concentrate on encouraging a long-term outlook among the investment professionals who manage their portfolios. CPPIB has been experimenting with a range of novel approaches, including offering to lock up capital with public equity investors for three years or more, paying low base fees but higher performance fees if careful analysis can tie results to truly superior managerial skill (rather than luck), and deferring a significant portion of performance-based cash payments while a longer-term track record builds.

2. Unlock value through engagement and active ownership.

The typical response of many asset owners to a failing corporate strategy or poor environmental, social, or governance practices is simply to sell the stock. Thankfully, a small but growing number of leading asset owners and asset managers have begun to act much more like private owners and managers who just happen to be operating in a public market. To create value, they engage with a company’s executives—and stay engaged over time. BlackRock CEO Laurence Fink, a leader in this kind of effort, tells companies not to focus simply on winning over proxy advisory firms (which counsel institutional investors on how to vote in shareholder elections). Instead, says Fink, companies should work directly with BlackRock and other shareholders to build long-term relationships. To be clear, such engagement falls along a spectrum, with varying levels of resources and commitment required (see the sidebar “The Equity Engagement Spectrum”). But based on their in-house capabilities and scale, all asset owners should adopt strategies that they might employ individually or collaboratively.

Some asset owners are large enough to engage on their own by formally allocating dedicated capital to a relationship-investing strategy. This could involve taking a significant (10% to 25%) stake in a small number of public companies, expecting to hold those for a number of years, and working closely with the board of directors and management to optimize the company’s direction. For smaller asset owners, independent funds like ValueAct Capital and Cevian provide a way to pool their capital in order to influence the strategies of public companies. The partners in such a coalition can jointly interact with management without the fixed costs of developing an in-house team.

Engaging with companies on their long-term strategy can be highly effective even without acquiring a meaningful stake or adopting a distinct, formal investment strategy. For example, the California Public Employees’ Retirement System (CalPERS) screens its investments to identify companies that have underperformed in terms of total stock returns and fallen short in some aspect of corporate governance. It puts these companies on its Focus List—originally a published list but now an internal document—and tries to work with management and the board to institute changes in strategy or governance. One recent study showed that from 1999 to mid-2013, the companies targeted through the Focus List collectively produced a cumulative excess return of 12% above their respective industry benchmarks after five years. Other studies have shown similar results, with companies doing even better in the first three years after going on the Focus List. Interestingly, the companies CalPERS worked with privately outperformed those named publicly, so from 2011 onward, CalPERS has concentrated on private engagement.

Despite the evidence that active ownership is most effective when done behind the scenes, there will inevitably be times when public pressure needs to be applied to companies or public votes have to be taken. In such cases, asset owners with sufficient capacity should go well beyond following guidance from short-term-oriented proxy advisory services. Instead they should develop a network with like-minded peers, agree in advance on the people and principles that will guide their efforts, and thereby position themselves to respond to a potentially contentious issue with a company by quickly forming a microcoalition of willing large investors. Canadian Pacific Railway is a recent example where a microcoalition of asset owners worked alongside long-term-oriented hedge funds to successfully redirect management’s strategies.

Transparency makes such collaborative efforts easier. In the United Kingdom, major institutions are required to “comply or explain” their principles of engagement under the UK’s Stewardship Code. Elsewhere, big asset owners and managers should also publish their voting policies and, when a battle is joined, disclose their intentions prior to casting their votes. Smaller asset owners or those less interested in developing in-house capabilities to monitor and engage with companies can outsource this role to specialists. Hermes Equity Ownership Services, for example, was set up by the BT Pension Scheme in the UK to provide proxy voting and engagement services to 35 global asset owners that together have some $179 billion under management.

Finally, to truly act as engaged and active owners, asset owners need to participate in the regulation and management of the financial markets as a whole. With some exceptions, they have largely avoided taking part publicly in the debates about capital requirements, financial market reform, and reporting standards. Some of the biggest players in the game are effectively silent on its rules. As long-term investors, asset owners should be more vocal in explaining how markets can be run more effectively in the interests of savers.

3. Demand long-term metrics from companies to change the investor-management conversation.

Making long-term investment decisions is difficult without metrics that calibrate, even in a rough way, the long-term performance and health of companies. Focusing on metrics like 10-year economic value added, R&D efficiency, patent pipelines, multiyear return on capital investments, and energy intensity of production is likely to give investors more useful information than basic GAAP accounting in assessing a company’s performance over the long haul. The specific measures will vary by industry sector, but they exist for every company.

It is critical that companies acknowledge the value of these metrics and share them publicly. Natura, a Brazilian cosmetics company, is pursuing a growth strategy that requires it to scale up its decentralized door-to-door sales force without losing quality. To help investors understand its performance on this key indicator, the company publishes data on sales force turnover, training hours per employee, sales force satisfaction, and salesperson willingness to recommend the role to a friend. Similarly, Puma, a sports lifestyle company, recognizes that its sector faces significant risks in its supply chain, and so it has published a rigorous analysis of its multiple tiers of suppliers to inform investors about its exposure to health and safety issues through subcontractors.

Asset owners need to lead the way in encouraging the companies they own to shift time and energy away from issuing quarterly guidance. Instead they should focus on communicating the metrics that are truly material to the company’s long-term value creation and most useful for investors. In pursuing this end, they can work with industry coalitions that seek to foster wise investment, such as the Carbon Disclosure Project, the Sustainability Accounting Standards Board, the investor-driven International Integrated Reporting Council, and most broadly, the United Nations–supported Principles for Responsible Investment.

But simply providing relevant, comparable data over time is not enough. After all, for several years, data sources including Bloomberg, MSCI, and others have been offering at least some long-term metrics—employee turnover and greenhouse gas intensity of earnings, for example—and uptake has been limited. To translate data into action, portfolio managers must insist that their own analysts get a better grasp on long-term metrics and that their asset managers—both internal and external—integrate them into their investment philosophy and their valuation models.

4. Structure institutional governance to support a long-term approach.

Proper corporate governance is the critical enabler. If asset owners and asset managers are to do a better job of investing for the long term, they need to run their organizations in a way that supports and reinforces this. The first step is to be clear that their primary fiduciary duty is to use professional investing skill to deliver strong returns for beneficiaries over the long term—rather than to compete in horse races judged on short-term performance.

Executing that duty starts with setting high standards for the asset owner’s board itself. The board must be independent and professional, with relevant governance expertise and a demonstrated commitment to a long-term investment philosophy. Board members need to have the competencies and time to be knowledgeable and engaged. Unfortunately, many pension funds—including many U.S. state and local government employee pension plans—are not run this way; they often succumb to short-term political pressure or lack sufficient expertise to make long-term investment decisions in the best interests of beneficiaries.

However, successful models do exist. For example, the New Zealand Superannuation Fund is overseen by a board of “guardians” whose members are selected for their experience, training, and expertise in the management of financial investments. The board operates at arm’s length from the government and is limited to investing on what it calls “a prudent, commercial basis.” The board is subject to a regular independent review of its performance, and it publishes its progress in responding to the recommendations it receives. Two other exemplary models are the Wellcome Trust, a UK-based global charitable foundation, and Yale University’s endowment fund; each delegates strategic investment implementation to a committee of experienced professionals.

Professional oversight needs to be complemented by policies and mechanisms that reduce short-term pressures and promote long-term countercyclical performance. These could include automatic rebalancing systems to enforce the selling of equities during unsustainable booms, liquidity requirements to ensure there is cash available to take advantage of times of market distress, and an end to currency hedging to reduce the volatility of short-term performance. Such policies need to be agreed to in advance of market instability, because even the best-governed institutions may feel the heat during such periods.

A case in point is Norges Bank Investment Management (NBIM), which invests Norway’s revenue from surplus petroleum (more than $814 billion) in the country’s global government pension fund. In 2007 the Ministry of Finance and NBIM set a long-term goal: to raise the equity content of the fund from 40% to 60%. Yet when the financial crisis hit, NBIM lost over 40% of the value of its global equity portfolio, and it faced significant external pressure not to buy back into the falling market. Its strong governance, however, coupled with ample liquidity, allowed it to continue on its long-term path. In 2008 it allocated all $61 billion of inflows, or 15% of the fund’s value, to buying equities, and it made an equity return of 34% in the following year, outperforming the equity market rebound. In similar circumstances a few years later, NBIM kept to its countercyclical strategy and bought into the falling equity market of mid-2011, turning an equity loss of nearly 9% that year into an 18% return in 2012.

A final imperative for the boards and leadership of asset owners is to recognize the major benefits of scale. Larger pools of capital create more opportunities to invest for the long term by opening up illiquid asset classes, making it cost-effective to invest directly, and making it easier to build in-house engagement and active ownership capabilities. According to analysts such as William Morneau, the Ontario Ministry of Finance’s pension investment adviser, these opportunities are often cost-effective once an asset owner has at least $50 billion in assets under management. That suggests that savers, regulators, and board members of smaller asset owners should be open to these institutions pooling assets or even merging.

Leading the Way Forward

Today a strong desire exists in many business circles to move beyond quarterly capitalism. But short-term mind-sets still prevail throughout the investment value chain and dominate decisions in boardrooms.

We are convinced that the best place to start moving this debate from ideas to action is with the people who provide the essential fuel for capitalism—the world’s major asset owners. Until these organizations radically change their approach, the other key players—asset managers, corporate boards, and company executives—will likely remain trapped in value-destroying short-termism. But by accepting the opportunity and responsibility to be leaders who act in the best interests of individual savers, large asset owners can be a powerful force for instituting the kind of balanced, long-term capitalism that ultimately benefits everyone.