March 11, 2011

McKinsey Calls for Kinder Capitalism!

Domini Barton, Global Managing Director of McKinsey & Co., is calling American business leaders to embrace a longer-term vision of corporate performance via a more socially-conscious stakeholder capitalism. He argues, much as I have here, that business must strive to provide greater economy-wide stability, lest the people lose faith in capitalism itself. He reports a growing anxiety in corporate American boardrooms should the economy suffer yet another downturn--and I would include a continuing decline of good middle class jobs--U.S. history may yet record a great 21 Century turn to socialism. It's not exactly clear why we should fear such a transformation, other than perhaps the fact that the article appears in the Harvard Business Review.

Barton seems to think this would be bad for business, and so business leaders should change before government forces them to do it in some presumably more debilitating fashion. We are not given examples, but perhaps he would point, much as I have, to the potential onset of protectionist economic policies and eventual U.S. withdrawal from the World Trade Organization. Putting aside the question of whether such moves would indeed be unfortunate, it does seem to make sense to argue that if less regulation is what they want, corporations must take on a vision of long-term stewardship that will restore the people's trust not only in them, but in capitalism itself.

I'm not sure this argument will persuade enough business leaders to stave off anti-capitalist revolt, but I applaud McKinsey for finally confronting this ethical issue head on. The article provides good examples of how longer-term vision has helped many companies compete surprisingly well, from Intel transitioning into microprocessors to Hyundai rolling out 10-year warranties. And it points us to how Asian and European businesses tend to imbue the longer-term virtues he espouses. Although Barton doesn't mention any connection here, it's interesting to note that these countries are generally already much more socialistic than the U.S., which should come as no surprise, since socialism by definition places more emphasis on stability. On the other hand, a somewhat more even-handed business philosophy just might be established here, despite what has become a rather frenzied consumerist culture.

If so, Barton provides three refreshing and concrete strategies for achieving it:

• Increasing board of director competence and engagement.

• Tying executive compensation much more closely to performance.

• Reforming shareholder power.

These are insightful aims and they point the way to a promising area of research that will be wonderful to see McKinsey engage in. Barton provides good ideas for achieving each one of these laudable goals. Perhaps the most revealing notion is the third one. Essentially, he is calling for giving greater voting power to shareholders holding shares longer than the current average of 7 months (down from 7 years in the 1970s). He takes for example certain French companies that double shareholder voting power after the first year.

Ultimately, if the long-view is going to take hold, shareholders need to support it. Obviously, leadership is needed at the top as well. But unless shareholders reward longer-term management by espousing those values themselves, a longer view is unlikely to happen in most cases. Thus, socially-responsible shareholder activists, which have been successful of late, should follow this recommendation by lobbying to reward their own longer-term holdings with greater voting power.

But ultimately, we all basically need to step back, take a deep breath, and take a longer, wider look around. McKinsey & Co. certainly is. And it's very nice to see, at long last.