BOOK REVIEW - Rebecca Henderson’s Reimagining Capitalism in a World on Fire: Injecting Social Consciousness Into Once Forbidden Territory

December 1, 2020
By Jeffrey P. Davis

“Again I tell you, it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the Kingdom of God.” Matthew 19:24

Is there a more worthy goal than to do good in society while profiting from the same activity? In the quarter century that I dealt with pension funds and foundations who were trying to invest well and accomplish social goals, I liked to speak of Matthew 19:24 and remind clients that even Jesus said it wasn’t going to be easy. In Rebecca Henderson’s new book, Reimagining Capitalism in a World on Fire, there opens a new path for the future of capitalism, a ‘journey’ that offers rewards, but is demanding. Henderson’s book is timely: there are many bad alternatives now being contemplated that threaten the best aspects of the free enterprise system.

Reimagining Capitalism, (‘ReCap’ is the shorthand for Henderson’s course), is popular with the Advanced Leadership Initiative(ALI) cohort at Harvard. Many ALI Fellows have journeyed through the swampy parts of the capitalist landscape, but our roadmap was drawn exclusively to guide us to the central mission of ‘maximizing shareholder value.’ The old ways of MBA education avoided many of the complicated subjects that Henderson takes on: mixing ethical judgement with the profit motive, aligning the corporate mission with fighting social ills, and asking the MBA student to seriously consider personal values in seeking business opportunities.

Henderson refreshes our memory in her opening chapter “When the Facts Change, I Change My Mind. What do you Do, Sir? Shareholder Value as Yesterday’s Idea”:

“In the majority of our boardrooms and our MBA classrooms, the first mission of the firm is to maximize profits. This is regarded as self-evidently true. Many managers are persuaded that to claim any other goal is to risk not only betraying their fiduciary duty but also losing their job.” (p. 9)

The mission of profit maximization had been built upon the work published by the University of Chicago during the 1970s:

“A central cause of the problems we face is the deeply held belief that a firm’s only duty is to maximize ‘shareholder value.’ Milton Friedman, perhaps the most influential intellectual force in popularizing this idea, once stated that ‘there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits.’ ”                (p. 12)

Henderson is not shy about the scope of her work. She covers the essential role of purpose in an organization’s mission statement, she presents prescriptions for redesigning financial markets, she examines the need for effective industry self-regulation and collaboration, and finally, she presents a personal prescription for making a difference in one’s own life.

Henderson devotes an entire chapter to case studies addressing the great promise of doing good and delivering business success. The examples are wide ranging, from the breakthrough idea of turning Lipton Tea into a sustainable brand not only in image, but also in practice, to Walmart’s efforts to support the New Orleans community following Katrina. While stories such as Phil Knight’s turnaround of the Nike brand image are already well-known to most business students, I found stories of lesser known companies like CLP Asia and NG more instructive of how disciplined business thinking can reframe risks and expose opportunities that less adventurous profit maximizers miss.

“In short, Erik (NG President) was able to translate his vision for improving the sustainability of the waste business into a new, highly disruptive - and highly profitable - business.” (p. 36)

I was encouraged by the stories of success of companies who could succeed on a social and business scale. But there are times I wished that there were tales of mangers who believed that ‘no good deed goes unpunished’ and yet acted for good anyway. I found myself thinking ‘where are the stories of the martyrs’? So often, resistance to new ideas is intense and poses career risk, and the do-good impulse is often punished with scorn, or worse. The eye of the business needle is often very small.

Corporate mission creation tends to be unappreciated in many real-world conference rooms. Yet the stories Henderson presents of Cadbury and of King Arthur Flour are great examples of how deeply embedding, revising, and evolving the core mission of an enterprise can lead to new opportunities and can strengthen the ability to pivot to meet unforeseen challenges and seize new opportunities.

“The widespread adoption of authentic purpose - a clear, collective sense of a company’s goals that reaches beyond simply making money and is rooted in deeply held common values and embedded in the firm’s strategy and organization - is an essential element of reimagining capitalism.” (p. 87)

Henderson’s break from the ‘maximizing shareholder value’ philosophy is most plain here. After all, if defining a purpose is simply adopting a better way to maximize profit, what’s the difference?

“Being authentically purpose driven can be a powerful business strategy. But you can’t decide to be authentic because it will be good business. That wouldn’t be authentic. Becoming authentically purpose driven is all about exploring the boundary between purpose and profit - about choosing to do the right thing and then fighting hard to find the business case to make it possible.” (p. 94-95)

Here, reimagining capitalism is defined as a challenge to explore in directions that were once frowned upon as distracting from the main mission of a company. Describing the process of exploration is a powerful way to frame this business philosophy for MBA students. A GPS system of the perils of that journey might be a good follow up text.

In one section, Henderson takes on the architectural redesign of global finance, “rewiring” as she calls it, and focuses on the major trends shaping the financial services industry. She gives an appropriate nod to the issues of management short-termism that has long been associated with sacrifice of long-term business health. This issue has diminished over recent years as the institutional investing world has shifted away from public equities towards private equity, the only issue she perhaps understates in the chapter. This shift represents, in part, a desire to avoid the costs and scrutiny of public markets - a cautionary tale for the temptation to over-legislate ethics. Between 1997 and 2017, the number of companies listed on the New York Stock Exchange has more than halved.

Much of the rewiring Henderson discusses is well underway. ESG (Environmental, Social, and Governance) information for money managers is now flowing abundantly and being provided for profit by independent research firms as well as brokerage houses. Publicly listed fossil fuel companies are now supplying broad ESG information in annual reports. Top management teams are now fully geared to account for climate impact issues during earnings season presentations. As I look back on the money management industry, I have to admit that today the financial tools are good for doing good; but are the money managers ‘good,’ or are they still focused exclusively on profit maximization?

The proxy voting concentration of index funds is addressed as well, and for good reason, because it has distorted the foundations of shareholder participation in public markets. As someone who has had to help set proxy voting policy for large index funds in emerging market countries, I believe the exercise of adequate shareholder responsibility is another needle-eye. Many who work with groups like Institutional Shareholder Services to establish top down voting criteria are keenly aware that one size does not fit all when it comes to proxy voting for global companies, and the costs of adequate hands-on analyst judgement is not economically viable today.

Readers with backgrounds in law and policy will find the closing chapters relating to collaboration particularly engaging, and this is also the territory where controversy is likely. Examples of collaboration among capitalist interests is a rocky coast of business history, but Henderson navigates it skillfully. Her recounting of the ‘White City’ period of Chicago in the late 1800s and the collaboration of private interests for public good is an essential one for students; it covers the potential for strength and success of aligned interests. Readers may also be intrigued that this is an environmental and climate collaboration from the 1890s.

“Between a Rock and a Hard Place: Learning to Cooperate” approaches group structures from a capitalist and selfish standpoint. The chapter title gives away its bias against unnecessary agreements or associations unless essential. But when done, the motivations must be aligned or failure will be swift:

“One of the reasons that voluntary bodies like the International Chamber of Commerce are so often successful is that the benefits they offer are tangible and immediate and the temptation to cheat is very small. When this isn’t the case, cooperation will only survive if it’s easy to see if someone is not pulling their weight.” (p. 191)

The 2020 bestseller How to be an Anti-Racist by Ibram X. Kendi asserts that the opposite of racist is not ‘not racist,’ but ‘anti-racist,’ and by reframing he creates a powerful counterpoint and prescription for behavior. Henderson examines inclusive organizations and uses the same linguistic counterpoint - the opposite of inclusive is best described by the word ‘extractive.’ Henderson traces the origins of this work to Acemoglu and Robinson’s book Why Nations Fail when used in a political context, but the word allows Henderson great flexibility in identifying companies as well as societies that deliberately concentrate power in a few.

“Economic growth in societies with strong inclusive institutions is more consistent, and inclusive societies are significantly more prosperous than societies living under extraction. Inclusive institutions are also a strong determinant of individual well-being.” (p. 215)

The final portion of Reimagining Capitalism in a World on Fire dives deeply into personal responsibility and conduct of practicing capitalists. I believe that different generations will react to this concluding section in different ways. For younger generations, the expression of explicit ethical judgement in the workplace is nothing new. For generations who are in their third or fourth decade of business practice, this mix is foreign. I felt a sense of sadness for myself as I finished the book. I believe if I had been aware of the option to take Henderson’s journey early in my own career, I may have had a more robust and lasting impact on the growth of institutions and investors I worked with. While I believe my generation of investors advanced the science of management in significant ways, I can see that developing ethical language and culture provides the opportunity for greater and more lasting success.

Reimagining Capitalism in a World on Fire is an engaging reframing of the role of individuals and institutions in a capitalist society. The reader may want more lessons on the noble failures and martyrs in the business world, but the success stories alone should draw readers to taking Henderson’s journey. Perhaps the eye of the needle can get bigger.

Rebecca M. Henderson is the John and Natty McArthur University Professor at Harvard University, a research fellow at the National Bureau of Economic Research and a fellow of both the British Academy and of the American Academy of Arts and Sciences. She is an expert on innovation and organizational change, and her research explores the degree to which the private sector can play a major role in building a more sustainable economy, focusing particularly on the relationships between organizational purpose, innovation and productivity in high performance organizations. For several years she taught “Reimagining Capitalism: Business & the Big Problems”, a course that grew from 28 students to over 300 and that is the basis for her book “Reimagining Capitalism in a World on Fire” (Hachette/Public Affairs, April 2020). Rebecca sits on the boards of Idexx Laboratories and of CERES. Her publication include  Leading Sustainable Change: An Organizational Perspective, and Accelerating Energy Innovation: Lessons from multiple sectors. She was named one of three “Outstanding Directors of 2019” by the Financial Times.


About the Author:


Jeffrey P. Davis worked in the investment management industry for 36 years before leaving to join the Harvard Advanced Leadership Initiative as a Fellow in 2020. He served as Chief Investment Officer for LMCG Investments in Boston, Rockefeller & Co. in New York City, and State Street Global Advisors. Jeff has served as Trustee and head of the finance and endowment committees at Berklee College of Music, Nurtury Early Education, and as Moderator for Second Church in Newton, Massachusetts. Jeff is a graduate of Duke University, holds an MBA from Vanderbilt University and is a Chartered Financial Analyst.



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