In 2007, the United States ran into the credit crisis. As a result of an overflow of subprime mortgages the housing market collapsed. Then the banks got into trouble and then the whole financial sector. Squeaking the global economy came to a standstill. Then followed the drastic cuts and substantial aid packages. In the meantime the first signs of recovery are visible, but for how long? Find out why the current strategy will provide only temporary relief. And ... what should be done.
A poignant victim of the debt crisis is Greece, which in 2009 faced an extreme budget deficit and a huge state debt. The country went into a deep economic depression with high unemployment. The EU stepped in to help out, but at a price: in addition to a variety of financial requirements Greece was summoned to sell state-owned enterprises. Think of banks, real estate, electricity and water companies, telephone companies and even ports. This is not without risk.
The idea behind this call to privatisation comes from the Chicago School of Economics. In the 1970s, under Milton Friedman’s, influence a strong call for less government emerged. Through deregulation, liberalisation and privatisation, the free market would have plenty of room to develop, for the benefit of others. In theory a nice idea, but easier said then done: if the market even affects utilities, then the shareholder has it made. And they are looking after their own interests ...
Also in listed companies, the free market thinking has a negative side. Shareholders pursue the maximisation of profits and that is always the main goal. Through providing bonusses 'the best people' are brought into the company, but this brings in excesses. Regularly reports in the media appear about top managers who receive exorbitant bonuses. A bizarre example we saw in 2009 – in the middle of the crisis - when Lloyd Blankfein (CEO of Goldman Sachs) stood to receive a bonus of as much as $ 100 million. After the commotion this was reduced to ‘only’ $ 9 million.
How is it that a top executive at a time of crisis, thinks a bonus of $ 100 million is acceptable? Blankfein did not really provide a rational explanation: ‘I'm Doing God's work’. A bizarre but significant remark as it shows that the connection to reality has been lost completely. Common ethical standards have made way to mere self-interest.
Blankfein is anything but an exception: the bonus culture is a widespread, a perfectly acceptable motivational tool for businesses worldwide. But as long as intrinsic motivation is purely guided by self-interest, the world economy will remain vulnerable. Because the credit crises was caused by the enourmous risks the U.S. bankers took. As long as we continue in the ‘old way’, it is just a matter of time before another crisis erupts. So it is high time for a different approach.
It's time for an assessment of capitalism: it is not only where it concerns business, but also regarding the relationship between a company and its immediate surroundings. What is the impact of business on the quality of the environment? Why so much waste? How much energy is lost during production needlessly? How sustainable are your suppliers? Creating Shared Value, that is the way to go. It would also be good if performance and compensation go hand in hand, especially when it comes to the bonus culture. Because why should bonuses always be paid? When poor performance is identified - as well as taking irresponsible risks - adjusting or even recovering bonuses should be possible. This clawback-principle might effectively address excesses like Blankfein.
To pursue shared value is not a luxury it is a necessity. Not only to avert a new crisis, but also to address the increasing scarcity of resources and growing population. But shared value is not just a matter for economic and political leaders, it also points to you as a consumer. Know what you buy, where you buy it. The market still has power. For now, it is more a love-hate relationship between capitalism and sustainability, but together we might tip the balance in the right direction. There is still a long way to go, but worth the effort.
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