For a Sustainable Capitalism

The year 2020 was disruptive for businesses, that are rethinking their role in social and other terms, and considering their activities from the standpoint of greater sustainability. Studies on "business finalism," understood as a process of continuous searching, definition, and redefinition of the meaning of individual, organizational, entrepreneurial, social, and institutional roles of business, trace back to Adam Smith. After having studied social and moral philosophy, as economics was not yet an academic discipline, Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, laying the basis for classical political economy, that became the reference point for all classical economics of the 18th and 19th centuries. The "invisible hand" of the market is the force that determines all economic activities and the specialization of labor the source of learning and efficiency ("production of pins"), while individual ambition serves the common good and the best results are obtained when each component of the group does what is best for himself.

Skipping over various steps, criticisms, and theories,[1] in 1950 John Nash questioned what had been asserted by Smith. He believed that equilibrium is reached when every individual action increases the overall wealth of the group, that is, when there is collaboration: the best result is obtained when each member of the group does what is best for himself and for the group[2] ("dominant dynamics").

In the meantime, in Italy, on the occasion of the inauguration of the 1926 academic year at the Ca’ Foscari University of Venice, Gino Zappa, who taught at the Bocconi University, gave a lecture entitled "New Trends in Accounting Studies," that constituted the founding manifesto of Italian business economics, understood as the unitariness of the fields of measurement, management, and organization of business. Zappa's intervention provoked a lively debate in the Italian field of business economics, generating an array of valiant disciplines and leading to the creation of the SDA Bocconi School of Business Management in Milan in 1971. For those years, this was a modern way of thinking that placed at the center of business the need to reconcile economic growth and fair distribution of resources, thus creating a new social model of development. This view came a number of years before what we define today as "sustainable development" from a stakeholder perspective.

On September 13, 1970, the economist Milton Friedman published a famous article in The New York Times Magazine where he argued that the only responsibility of a business is to maximize profits for its shareholders, speaking of a zero-sum game based on the clash between the idea of social responsibility and the interests of shareholders, assigning victory to the latter.[3] Business leaders read his arguments and took careful notes. Thus shareholder primacy, or shareholder capitalism, was born. The rise of Friedman's thinking in the 1970s and 80s was accompanied by the erosion of regulations on business and protections for workers, the birth of strategies based on "cost leadership," and market finance and its excesses.

In the same period, there was a very lively debate on the aims of business, with the other side of the field occupied by so-called "stakeholder theory." The founding text of this approach is Ed Freeman's 1984 book entitled Strategic Management: A Stakeholder Approach, that to start with, had a normative side in which it argued that in order to have success, not only does business need the contribution of stakeholders, but that success consists of satisfying stakeholders, despite their not strictly being an input into the production process.

On March 31, 1987, the Norwegian Prime Minister Gro Harlem Brundtland, chairman of the World Commission on Environment and Development, established five years earlier, presented the report entitled Our Common Future, that defined sustainable development as the model that allows present generations to meet their needs without compromising the ability of future generations to meet their own needs. The need to rethink the way of doing business from a sustainable standpoint received further impetus from the 2030 Agenda for Sustainable Development, the action plan for people, the planet, and prosperity signed on September 2015 by the government of the 193 member states of the United Nations. The 2030 Agenda sets 17 Sustainable Development Goals (SDGs) presented in an action plan with 169 targets to be reached by 2030. The UN program identifies the need to achieve socially responsible ways of producing and consuming, that are compatible with the search for just profits but also with social cohesion and respect of the environment on the part of businesses.

In 2019, 181 North American CEOs belonging to the Business Roundtable,[4] including Jeff Bezos of Amazon, Tim Cook of Apple, Mary Barra of General Motors, and Doug McMillon of Walmart, signed a new "Statement on the Purpose of a Corporation," that stresses the centrality of stakeholders, adopting a long-term approach to the processes of value creation, according to which, along with profit for shareholders, businesses must also pursue other interests, having a sustainable purpose for all stakeholders. This is a manifesto destined to mark a change in pace in the way business leaders and companies define their aims and responsibilities. We could say, on the one hand, that this is a response to the "A Sense of Purpose" letter written in 2018 by Fink, and on the other, to use an example from Italy, a return to the approach of Adriano Olivetti in the 1950s (finally!).

Let us add another element to what has been presented so far. For four years, Laurence D. Fink, the CEO of BlackRock, a totem of financial capitalism, wrote a letter to the board members of all large listed companies on the indispensability of definitively dismantling the focus on short-term results and taking action on sustainability, pursuing goals of creation of long-term value that can be preserved by avoiding cuts in expenses and investments for social and environmental sustainability, with the result of extracting value from stakeholders that is used to pump up the quarterly profits of shareholders. In the last letter, in 2020, Fink states that sustainability must be the new standard for investment.

In January 2020 at the World Economic Forum of Davos, in pre-Covid-19 times, the theme chosen was "How Stakeholder Capitalism Can Solve the World’s Urgent Challenges," and in September 2020 a white paper was published with the title "Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation,"[5] with the goal of accelerating convergence towards the standardization of reporting on ESG indicators. Lastly, we can recall the legislation on benefit corporations introduced in Italy in 2016, or also in 2020, the Corporate self-governance code of the Italian Stock Exchange was updated, with various new aspects for Italian listed companies, including the policy of involving shareholders and the concept of "sustainable development."

It is evident that stakeholder capitalism, attentive to everyone's interests and not only those of shareholders or profits, already implied a shift with respect to shareholder capitalism, opening the path to a sustainable form of capitalism.

After years of indifference by the majority of companies, but also after years of heavy skepticism by much of the world of economic-business disciplines, the challenge of climate, the scarcity of resources, human rights, gender equality, and the question of inequality have become central themes in the agendas of those who guide businesses, and increasingly the subject of debate in international business schools.

Fifty years after Friedman, the supremacy of shareholder value seems to be over, while after thirty years, the definition of sustainable development still seems to be valid, commonly-used, and above all very relevant. Today, citizens and business leaders invoke a change of mentality in favor of a sustainable capitalism in which businesses are responsible towards all stakeholders, including customers, employees, suppliers, communities, institutions, and shareholders/investors. It is no coincidence that one of the most commonly used terms in managerial vocabulary today is in fact "sustainability."

It also seems that the current health, economic, and social emergency caused by the coronavirus pandemic has heightened attention towards sustainability. This is an "acceleration of history," as effectively defined by the Israeli historian Yuval Harari. Green and social themes have become a central element on which the restart is to be founded. With the beginning of the European presidency of Ursula von der Leyen, a green shift has occurred in Europe, thanks to the decision to concentrate national and European financial resources on the "Green New Deal" in the coming years, with the approval of an Action Plan in July 2019 that foresees the allocation of approximately 1 trillion euros over a decade to transform the climate and environmental challenge into an opportunity, guaranteeing the development of a fairer, more prosperous society, founded on a modern and competitive economy. That trend was then accelerated and increased following the agreement to fund the Next Generation EU with 750 billion euros ("Supporting the Green Transition to a Climate-Neutral Economy Via Funds from Next Generation EU"). Italy will be the largest beneficiary, with almost 209 billion euros ("National Plan for Recovery and Resilience").

In short, capitalism was already in a deep crisis beforehand, but it has been definitively unmasked by the coronavirus pandemic and the damage it has caused to globalized financial structures, constructed on the fragile foundation of debt and credit. Moreover, the old capitalist model is no longer able to guarantee human wellbeing, and is pushing the planet's ecosystem towards collapse. Not only are there evident deficiencies in development/production/waste disposal, but the request for a more circular and sustainable economy is intensifying. It is now clear to all that no future can exist without stakeholders who are alive and in good health. Therefore, the need to construct a new sustainable capitalism is no longer a contradiction.

Speaking of sustainable capitalism, great attention should be paid to the rethinking that has been underway for some time of the role and function of businesses, including in light of the acceleration seen in the dynamics of business finalism post-coronavirus. This is a dynamic that, with specific regard to business activities, has been present for decades, with "managerial waves": from business ethics to growing attention to investments and Corporate Social Responsibility-CSR projects; from strategically integrated corporate sustainability and with implications on business choices in terms of impact, to attention to Environmental, Social & Governance-ESG factors for the evaluation of businesses by the financial community.

Ignoring the agenda of ESG finance is practically impossible. As Fink wrote, each business should not only worry about achieving good economic-financial performance, but also demonstrate how and how much it is contributing to generating positive performance for the socio-environmental context in which it operates. What has changed in recent times is that many have been forced to intervene to accelerate the digital technological transformation of their organizations, but at the same time, also reconsider their purposes, having to re-imagine their future.

There has been an acceleration of the process of finalistic transformation of businesses towards sustainability, and as a consequence, of the "purposeful business transformation" of organizations, relations, and corporate governance, as well as the daily behavior of individuals and organizations. In order for that transformation to function, logical or causal aims and objectives must have a true, lasting reason to exist, that justifies the existence of the business in social terms. This is not an easy process, but one that requires method and sacrifice, in addition to involvement, to balance economic objectives and performance and purpose. The challenge is above all to choose aims consistent with the nature, activity, history, and culture of the company, with processes of integration between short-term economic-financial goals and long-term performance objectives, overcoming the dualism between negative short-termism vs. positive long-termism. After having defined the new purpose, to transform a company it becomes essential to develop new organizational routines from that perspective, that make business processes increasingly interconnected, influencing the dynamics of value generation.

In conclusion, business sustainability has gone from being a predominantly ethical and voluntaristic question, or a response to external pressure, to a strategic issue entailing the rethinking of the purposes of business in a broader sense. This is the end of business as usual, and it is important to go beyond Michael Porter's view of the globalization of business based on the pursuit of cost leadership strategies, that is, to outgrow capitalism based on the low-cost specialization of the value chain,[6] as stressed again in 2011 with Kramer,[7] launching the concept of "shared value" at the planetary level,[8] defining Corporate Shared Value-CSV as the "set of policies and operating practices that enhance the competitiveness of a company while advancing the economic and social conditions in the communities in which it operates."[9]

The creation of shared value is focused on the identification and expansion of connections between economic and social progress. Energy must be dedicated to reviving communities and the purpose of business from the perspective of sustainability, again linking finance to the real economy and developing new levels of managerial excellence able to holistically combine business growth with social and environmental needs, integrating sustainability into governance logics and the processes of technological innovation and product design, business models and supply chains. This can favor both the development of excellent and sustainable businesses and an increasingly circular economy, ultimately seeking a broader affirmation of stakeholder capitalism.

"Sustainable capitalism" will thus be a trend to follow and pursue even after the definitive end of the pandemic crisis.