Minnesota laid groundwork for CEOs' revised theory on capitalism

Has America just hit an inflection point in the evolution of capitalism? And, as America changes, will the world?

We don't often acknowledge it but, since its birth in the Calvinist cultures of Holland, England, Scotland and the Dutch/English colonies in North America, capitalism has been an evolving system. Adam Smith described an economic order that was inherently open and adaptable. Karl Marx understood that capitalism brought about change, but only dimly and imperfectly.

Today we live in a capitalism which neither Smith nor Marx would recognize: a postagricultural, postindustrial, financialized, global system of interlocking markets facing potentially ruinous environmental dangers.

Tomorrow, capitalism will be different yet again. It will continue to evolve through small steps, one after another, in keeping with needs and opportunities, risks and dead-ends.

So, what just happened? On Monday, 200 CEOs of major American public corporations conceptualized a new theory of the capitalist firm. The Business Roundtable released a statement postulating that: "Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country."

The conventional theory of the capitalist firm arose during the industrial phase of capitalism, when great corporations emerged to supply the rising middle class with goods and services on a mass scale. Taught in all MBA programs, the conventional theory assumed that the only purpose of a corporation (really any business firm) was single-minded achievement of short-term cash profits for owners.

This purpose often resulted in cost-cutting in order to win customers, keeping wages down and automating jobs. Owner-focused capitalist firms also often sought growth in scale to accumulate market power and then extract "rents" as micro-economists call returns to power or what ordinary people might call "excessive" profits.

Employee contributions to the firm were measured only as a cost to the firm. Employee well-being did not show up on the firm's balance sheet as an asset.

A firm's impacts on consumers, the environment, the community were considered as "externalities" — effects for which the firm incurred no cost when they were harmful and received no compensation when they were beneficial. Success was just making lots of money for shareholders/owners. Failure was bankruptcy or being taken over and made more "efficient" in the making of profits.

The Business Roundtable is to be thanked and congratulated for recognizing that a new era has arrived for capitalism. Stakeholders count — customers, employees, suppliers, communities and the environment — and must be included in any measurement of firm success or failure.

Minnesotans can take quiet pride in being ahead of this curve. The stakeholder theory of the firm is not a new concept. Many Minnesota companies have long been operated with stakeholders very much in mind. Minnesotans instinctively worked for win/win relationships between business and community. I suspect that Lutheran, Calvinist and Catholic social teachings gave Minnesotans a values perspective that they brought to their various vocations.

Twenty-five years ago, Minnesota business leaders encouraged peers from Japan and Europe to set forth a set of ethical principles for capitalist firms. That Minnesota initiative focused on taking care of stakeholders. It spoke through an international network, the Caux Round Table (CRT) for Moral Capitalism.

The capitalism envisioned by the Business Roundtable is the very same free-market alternative we at the CRT call moral capitalism. It is a balance wheel between the old, owner-centric, capitalism and socialism.

Last January, U.S. Rep. Joseph Kennedy III, D-Mass., called out moral capitalism for praise and emulation. He welcomed the new theory of the firm just affirmed by the Business Roundtable as in line with his vision of "moral capitalism."

But coming up with a good theory is not enough. Now the evolution of capitalism must continue, step by step, to invent new measures of success and failure, new metrics to teach in business schools, and new standards of risk management which internalize impacts on a firm's stakeholders.

We must build on the best parts of our heritage to carry a moral capitalism forward.

Stephen B. Young is global executive director of the Caux Round Table for Moral Capitalism.