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My presentation to the University of Connecticut School of Business MBA Class.
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Toward Moral Capitalism
Reconciling private interest with the public good
CauxRound Table
BUSINESS LAW 5175 -- Business, Law & Ethics in Modern Society
John Friedman – Sustainable Business Network of Washington
The Caux Round Table (CRT) is an international network of principled business leaders working to promote a moral capitalism.
The CRT advocates implementation of the CRT Principles for Business through which principled capitalism can flourish and sustainable and socially responsible prosperity can become the foundation for a fair, free, and transparent global society.
The Caux Round Table
Steve Young
www.cauxroundtable.orgtwitter: @CauxRoundTable
Co-founding board member of the Sustainable Business Network of Washington (SB NOW); a partner organization with CRT
20 years+ career including corporate communications/organizational development, public/community relations, sustainability and CSR
About Myself
www.sbnow.orgtwitter: @SustBusNOW
@JohnFriedman
Background History and theory Global financial crisis
◦ What happened◦ What can/should we learn from it
Moral Capitalism ◦ Determining ‘true’ value◦ The Caux Round Table principles in action
Overview
Capitalism is an economic, not a political model
Culture (nationality, faith, etc.) define how capitalism is implemented
Individual wealth creation – the ability to earn and retain capital – is a tremendous force for change
Short-term thinking is inconsistent with long-term best interests
At the outset …
15th/16th Century Venetian accounting system and argosy voyages - entrepreneurs began to combine
capital and labor in discrete projects. Evolved into going concerns called corporations
1600 – 1750 Capitalism grows prosperous in Holland, England and Scotland
1776 An Inquiry into the Nature and Causes of the Wealth of Nations
- Adam Smith
1830 – 1870 Abuses of capitalism(mills of Manchester; Ebenezer Scrooge)
Communist Manifesto – Marx, EngelsDas Kapital - Karl Marx
A Brief History of Capitalism
1880 – 1980 Non-communist response:welfare state capitalism
Bismarck’s reformsFree trade unionsJohn Maynard Keynes / New DealJapan, Inc.Austrian school of economics
1989 – 2004 Collapse of communismRise of CSRCRT Principles for Business (1994)United Nation’s Global Compact
(2000)Moral Capitalism - Stephen B. Young
A Brief History of Capitalism
Adam Smith
Observed economic reality - people act in their own interest. Self-interest not always good but alternative is worse: "By pursuing his own self interest he frequently
promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” (p. 456).
In free/open markets, how does a nation keep its capitalists from moving their capital out of the nation and into other countries where labor could be bought more cheaply?
“(By) preferring the support of domestic to that of foreign industry," the capitalist will in a sense be "led by an invisible hand to promote an end which was no part of his intention."
On the Wealth of Nations
Does that (still) hold true in 2010?
Cash for Clunkers - Results
Sub-prime mortgage loans made, increasingly against future resale value of the home, not against real income
Mortgage loans packaged and sold to global capital markets
Collateralized debt obligation (CDOs) issued to finance purchases of packages of sub-prime mortgages and to invest in hedge funds
Credit default swaps invented to give added value to CDOs
Debt upon debt upon debt
Low interest rate environment
Incentive structure driven by fees, not investment in long-term returns
So what happened?
1620 Tulip mania 1711/1720 South Sea Company London 1719/1720 Mississippi company France 1929 Wall Street 1980s Junk bonds 1990s Dot.coms/telecom Today Sub-prime mortgages/CDOs
Financial meltdowns are a systemic dysfunction of capitalism
Men, it has been well said, think in herds; it will be seen that they go mad in herds,
while they only recover their senses slowly, and one by one. – Charles MacKayIrrational exuberance – Alan Greenspan
Current crisis is global AIG Fortis Iceland EU guarantees bank deposits UK takes over two banks Equity markets in Asia tank Price of oil drops by 50% Real economies lose employment and consumer
demand
Why is this time different? Is it?
World Trade Organization International Monetary Fund World Bank G20 Bank for International Settlements Etc.
World economic order has inadequate mechanisms to prevent financial crises
Principles Outcomes
Principles Congruent with Self-Interest
Premises of Moral Capitalism
Principles Drive Real Outcomes
Whenever a system produces a consistent result, the inevitable conclusion is that that system was designed to produce that result, regardless of whether or not the outcome matches the intended outcome.
What are the principles that are driving outcomes?
When short term shareholder returns are elevated to a core value, corruption is inevitable. – Noel Purcell, CRT Chair
When financial markets implode, markets lose liquidity, exchanges of goods and services fall, output is reduced, employment is cut
Debt must be taken out of the financial system
Asset values have to be reset at lower levels
Asset owners lose wealth
What happens when bubbles burst?
When the distance between the haves and have-nots is perceived as insurmountable; the status quo is threatened …
Bear Stearns (2008)◦ March 14 - $80/share book value ◦ March 17 - $2/share◦ May 10 – sold at $10/share after shareholder outcry
and assistance from Federal Reserve Bank
Lehman Brothers◦ Despite billions in assets, management liquidated the
company as no buyers emerged with confidence in it as a going concern
How do you determine ‘real’ value of assets? It is the INTANGIBLES that define value
Most simple calculation:
What is a company worth?How do we measure its value?
Discounted net present value of future income
Capitalization multiplierx
You cannot establish value without putting risk into the calculation
◦ What is the risk of not achieving predicted future revenue?
◦ How certain are estimates of future income?◦ What are the risk factors that determine the
capitalization multiplier? ◦ A higher risk demands a lower multiplier
First Fundamental Conclusion
Note: Each source of risk drives business value up or down
Higher Increased LowerRisk Uncertainty present value
Management of risk enhances enterprise value
- Risk management leads to more certain income
- Risk reduction leads to higher valuation
Second Fundamental Conclusion
Stakeholder relationships entail risk - customers - investors - government regulators - employees Each relationship is an intangible asset of the
business (assets can appreciate or depreciate) Lowering risk for each relationship enhances the
quality of intangible assets and increases business valuation
Strategies for Managing Risk
The Good The Bad The Ugly
How do companies create value?
Risk Assessment/continuous Risk Reduction
Optimize Stakeholder Benefits
Moral Capitalism
The Good
Feed Shareholders, Abuse Stakeholders
Commodity pricing/ compete on pricing/low costs
Rent seeking (market power)
Take the money and run: short-term thinking
Unsustainable Valuations = Eventual Failure
The Bad
No net wealth creation; speculation in trading (Rob Peter to pay Paul)
Irrational Exuberance (Market traders/short termism)
False Valuations (Enron: Ponzi Schemes; sub-prime mortgages, CDOs…)
Encourage unsustainable pricing (of securities CDOs, CDSs)
INEVITABLE FINANCIAL MELTDOWN
The Ugly
Intangible Assets = CSR Stakeholder Relationships◦ Customers◦ Employees◦ Owners/Investors◦ Suppliers◦ Competition Strategies◦ Community Support
CSR and Valuation
Tangible Values
Intangible Values
Financial Capital
Physical Assets
(Generally Audited Financial Information)
(Generally Non-audited, Non-financial Information)
Intellectual property
Unallocated goodwill
Labor environment
Brand loyalty
Sustainability
Quality of employees Community
support
To improve company valuation,Improve CSR relationships!
Good CSR Relationships Lead to The Sustainable Corporation
Conclusion:
Far beyond the goods and services your company provides
The IMPACTS* those goods and services and the manner in which they are produced have on peoples’ lives
What does your company do?
* Real and perceived
Needed for quality income
Necessary to get low cost of capital
Critical to hire/retain the best employees
Gets you through rough times
Avoids commodity pricing/builds value added
Reputational Capital(brand equity; goodwill)
Taking Due Care of Stakeholders Enhances Capital Accounts
Undermining Stakeholders Puts Capital Accounts at Risk
The power of reputational capital
For whom would you rather work?For whom would you rather tell people you work?
The Theory of the Moral Firm(self interest considered upon the whole)
ReputationalCapital
SocialCapital
FinancialCapital
PhysicalCapital
HumanCapital
ConversionProcess
Output(Goods/
Services)Customers
$$$Sustainable profits; maximum
value
INPU
TS
RETURN ON CAPITAL(preserve adequacy of capital inputs)
The Corporate Improvement Cycle
Management Action
CRT Assessmen
t
Performance Feedback to Management
Performance Improvemen
t
Board of directors CEO Senior management Division heads and group managers Unit managers Employees
Who participates?
An exampleA.
Fundamental Duties
B. Customers
C.Employees
D. Owners/
Investors
E. Suppliers/ Partners
F. Competitors
G. Community Performance by
Principle
1.Responsibilities of Businesses 6.5/5.2 6.3/5.1 6.0/4.8 6.8/5.2 5.9/4.9 6.1/4.8 6.4/5.4 44.0/35.4
2.Economic/ Social Impact of Business
6.0/5.3 5.6/4.7 6.7/4.5 4.9/4.4 4.9/4.4 6.6/4.6 5.1/5.2 39.8/33.1
3.Business Behavior 6.4/5.0 5.8/5.0 5.8/4.2 6.2/5.0 5.0/4.5 5.5/4.6 5.2/4.5 39.9/32.8
4.Respect for Rules 5.9/5.3 6.8/5.9 6.5/5.6 6.5/5.7 6.1/5.6 6.2/5.6 6.9/5.2 44.9/38.9
5.Support for Multilateral Trade 6.9/5.2 6.3/5.0 6.5/5.2 6.2/5.2 6.0/4.8 6.4/4.4 7.2/5.0 45.5/34.8
6.Respect for Environment 7.0/6.6 6.0/5.3 5.7/4.4 6.3/5.6 5.2/4.2 4.4/4.4 4.7/4.0 39.3/34.5
7.Avoidance of Illicit Operations 6.7/5.8 6.5/5.8 6.8/6.5 6.3/5.4 6.5/5.2 6.0/5.2 5.9/5.7 44.7/39.6
Performance by Stakeholder 45.4/38.4 43.3/36.8 44.0/35.2 43.2/36.5 39.6/33.6 41.2/33.6 41.4/35.0 298.1/249.1
Caux Round Table Japan
Vision not yet fully embedded across the company.
No integrated local community development program across different countries.
Company internal communication is poor on the issue of environment.
Customers' trust is weak. Communication with suppliers/partners is poor.
High level of compliance, risk management and internal audit have been achieved.
Caux Round Table Japan
“It's not your blue blood, your pedigree or your college degree. It's what you do with your life that counts.”
- Millard Fuller◦ Businessman/entrepeneur◦ attorney◦ self-made millionaire by age 29◦ founder/president of 8th largest homebuilder in
America
Thank you!Questions? Comments? Thoughts?
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