The Tokyo Foundation for Policy Research


The Tokyo Foundation for Policy Research

Advances toward Public Interest Capitalism

February 23, 2012

Since the Tokyo Foundation’s project on Public Interest Capitalism called for a more balanced form of capitalism two years ago, the idea has been gaining support. In a nationally televised interview at the 2011 Tokyo Motor Show, Toyota CEO Akio Toyoda associated his company’s growth with public interest capitalism [1] . The Japanese term for public interest capitalism, koeki - shihonshugi , has appeared in major online dictionaries such as the Asahi newspaper’s Kotobank [2] . Outside of Japan, economic troubles in the United States and the European Union have fueled an increasingly vigorous discussion about the future of capitalism.

The problems we identified in the Public Interest Capitalism project have not been solved. The advanced nations suffer from anemic growth and rising inequality. Our societies are financially and environmentally unsustainable. Capitalism, in its present form, conflicts with the public interest. The dramatic events of 2011, from protests against austerity in Greece to skyrocketing interest rates in Portugal and Italy and the Occupy Wall Street protests in the United States, underscored the severity of the situation.

Calls for Reform

Fortunately for the cause of public interest capitalism, leading thinkers are beginning to advocate reform of capitalist institutions. Prominent academics have made the case for change in articles titled “How to Fix Capitalism” (Michael Porter and Mark Kramer), [3] “Is Modern Capitalism Sustainable?” (Kenneth Rogoff), [4] “Self-Interest, Without Morals, Leads to Capitalism’s Self-Destruction” (Jeffrey Sachs), [5] and “The Ideological Crisis of Western Capitalism” (Joseph Stiglitz). [6]

Even the Financial Times has joined the movement, with an op-ed series entitled “Capitalism in Crisis.” [7] As Lawrence Summers observes in the first article in the series, “It would have been almost unimaginable five years ago that the Financial Times would convene a series of articles on ‘Capitalism in Crisis.’ That it has done so is a reflection both of sour public opinion and distressing results on the ground in much of the industrial world.” [8]

In this essay, I would like to discuss two recent articles of particular importance. The first is the above-mentioned article by Porter and Kramer, published about a year ago in the January-February 2011 issue of the Harvard Business Review . Porter and Kramer describe how serving customers, suppliers, and society as well as shareholders can drive innovation and economic growth. Another article, based on research at the Bank of England, shows how shareholder-oriented capitalism can cause destructively short-sighted decision-making—a central theme of our research.

Together, these articles provide compelling evidence that public interest capitalism may outperform shareholder-oriented capitalism not only with respect to sustainability and social welfare but also in terms of economic growth, corporate profits, and even shareholder returns.

“The capitalist system is under siege,” write Porter and Kramer, “and business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community.” [9] Rather than refuting these charges, Porter and Kramer place the blame squarely on “companies themselves” for pursuing “an outdated approach to value creation.”

Companies are “optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success.” The authors even attack the dominant paradigm of profit maximization: “The purpose of the corporation must be redefined as creating shared value, not just profit per se.” It is surprising to find Michael Porter, one of the world’s most influential business academics, leveling such stinging criticism at US managers.

That the article appeared in and was featured on the cover of the Harvard Business Review —arguably the country’s leading publication for senior managers—makes it all the more remarkable.

Creating Shared Value

Calling attention to the problem of greedy, short-termist management is a contribution in itself, but Porter and Kramer go a step further: They articulate a mechanism by which “creating shared value” may lead to growth and innovation. To create shared value, managers must focus on satisfying the needs of customers, employees, suppliers, local communities, and society as a whole. To meet these needs profitably, companies must develop new technologies and business models. Porter and Kramer cite numerous examples of how social needs present opportunities for innovation that gives rise to profitable new businesses.

In the Public Interest Capitalism project, we emphasized the importance of economic institutions—the laws, habits, customs, and values that influence decision-making by economic actors. When institutions encourage productive activity, such as Porter and Kramer’s creation of shared value, societies prosper. When institutions encourage destructive activity, exemplified by the short-term profiteering and asset-stripping often associated with hostile takeovers, societies decline.

If, as Porter and Kramer propose, we define the purpose of the business corporation to be “creating shared value,” and if we develop legal and managerial institutions consistent with this purpose, we may substantially advance the cause of public interest capitalism.

Creating shared value involves identifying and understanding societal needs, researching new technologies, developing new or improved products, and fine-tuning production processes. These activities require time and sustained effort.

By contrast, appropriating value is quick and relatively easy: cut wages and benefits, downsize, put pressure on suppliers, implement clever tax-avoidance strategies, etc. Of course, these measures have long-term costs, from angry and distrustful employees to weakened supply chains and deteriorating social infrastructure. The more managers focus on short-term profit, the more innovation and growth decline, while long-term costs rise.

Though the evils of short-termism are widely recognized, the extent and impact of short-termism have been difficult to quantify. Recent research by Haldane and Davies at the Bank of England makes an important contribution toward filling this gap. [10]

Haldane and Davies use stock price data and statistical techniques to estimate how shareholders value future profits. They find evidence of short-termism in both the United States and Britain. That is, investors value profits in the distant future disproportionately less than profits in the near future, even after accounting for the time value of money. The authors also find that short-termism increased significantly over the two decades from 1985 to 2004.

The levels of short-termism measured by Haldane and Davies are large enough to substantially distort investment decisions. If companies seek to maximize profits for their myopic shareholders, the companies will underinvest and sacrifice long-term profits. Truly long-term projects, such as railway lines or major research initiatives, may be abandoned altogether.

Public policy measures will probably be required to prevent short-termism from undermining economic growth. Haldane and Davies discuss several proposals, including two that we recommended in the Public Interest Capitalism project: tax systems that favor long-term shareholders, and corporate governance mechanisms that give greater influence to long-term shareholders. That such proposals are being seriously discussed at the Bank of England is a welcome development indeed.

Every day, managers face myriad choices between investing in innovative projects with potential to create new value for stakeholders or leveraging the company’s resources to redistribute value from one set of stakeholders to another. The institutions of shareholder-oriented capitalism—from accounting principles and corporate governance regulations to incentive systems and managerial ideologies—encourage managers to choose redistribution over investment, quick payouts over sustainable profits. Without institutional change, companies will continue to drag their host economies into stagnation, decline, crisis and social disintegration.

There already exists an ample supply of “big ideas” to guide reform, including but by no means limited to public interest capitalism and creating shared value. Now we must invest our effort in the painstaking, time-consuming, and inherently uncertain work of institutional innovation.

[1] During a TV Asahi news interview, broadcast December 1, 2011.


[3] Michael Porter and Mark Kramer, “Creating Shared Value,” Harvard Business Review . January-February 2011, pp. 62–77.

[4] Kenneth Rogoff, “Is Modern Capitalism Sustainable?” Project Syndicate , December 2, 2011.

[5] Jeffrey Sachs, “Self-Interest, Without Morals, Leads to Capitalism’s Self-Destruction,” January 18, 2012.

[6] Joseph Stiglitz, “The Ideological Crisis of Western Capitalism,” Project Syndicate , July 6, 2011.

[7] Financial Times , “Capitalism in Crisis,” accessed February 15, 2012.

[8] Lawrence Summers, “Current Woes Call for Smart Reinvention not Destruction,” Financial Times , January 8, 2012.

[9] Michael Porter and Mark Kramer, “Creating Shared Value,” Harvard Business Review . January-February 2011, pp. 62–77.

[10] Andrew Haldane and Richard Davies, “The Short Long,” speech at the 29th Société Universitaire Européene de Recherches Financières Colloquium: New Paradigms in Money and Finance? Brussels, May 2011.

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