Responsible Capitalism

The Oxford Dictionary defines capitalism as “an economic system in which a country’s businesses and industry are controlled and run for profit by private owners rather than by the government”. Capitalism is the system we live in and it is the system that has been adopted by the member countries of the former Soviet Union and by China, following the market reforms introduced by Deng Xiaoping. There is almost no country today that has not organized its economy around market exchange and private property. But Capitalism comes in different forms and today it is facing a major crisis.

In the last two decades we have witnessed the near collapse of the global financial system, a falling labour income share and a rise in inequality.[1] We are no longer talking about climate change and pollution, but about climate crisis and ecological collapse. Yet, the car industry recently produced Dieselgate and clean long-haul air transport is not yet in sight. Fossil fuel companies continue to frack and explore. A handful of tech-giants are dominating the internet and threaten to replace or control what remains of the independent press. In 2020 the Covid-19 pandemic further exposed and accentuated the failings of the capitalist system. The rise in Populism and disenchantment with Globalization are undermining the post WWII free-market order.

The United Nations has taken an early lead in formulating a new vision to reform Capitalism, emphasizing responsibility over free initiative. In 2005 the then United Nations Secretary-General Kofi Annan initiated the development of Principles for Responsible Investment (PRI).[2] Since the PRI were published in 2006 the number of signatories has grown from 63 to 3038 in 2020, representing a combined 103 $US trillion under management. In his 2016 letter to shareholders, the CEO and founder of the World’s largest asset manager, BlackRock, stated that “over the past several years, I have written to the CEOs of leading companies urging resistance to the powerful forces of short-termism afflicting corporate behavior”.[3] In December 2017 a coalition of large institutional investors launched Climate Action 100+ to collectively engage with the World’s largest greenhouse gas emitters. In 2018 Larry Fink urged CEOs to recognise that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”[4]

With the whole world gradually embracing PRI, the US corporate establishment at last shifted tack in 2019 and joined the responsible capitalism bandwagon, with the Members of the United States Business Roundtable making a first commitment to redefine the purpose of business in society. The CEOs of 181 of the largest corporations issued a statement agreeing that business should no longer be run purely for profit, but in the interest of customers, employees, suppliers, communities and shareholders. In an editorial the Financial Times commented “Reinventing capitalism for the long-term is a far from easy task. … Adding the label ‘purpose’ on to existing corporate models will not be enough.”[5]

How can we reform capitalism, so that company bottom-lines become “people, planet, profit”? Policy makers and many companies in Europe have already started to embrace this challenge. A number of initiatives are under way at all levels, but so far, these various initiatives remain uncoordinated, many lack ambition, while others are misguided. In particular there is an acute lack of input from academic researchers in the social sciences. 

On climate, the new European Commission has announced a “New Green Deal” and is committed to continue the work on “Sustainable Finance” started under President Junker. However, the route it has adopted departs from established policies. DG Financial Services did not delegate the task of developing an integrated reporting framework to the International Financial Reporting Standards (IFRS) but proposed its own taxonomy, initially limited to the environment. There are parallel and potentially rival initiatives at a global level, including the Global Reporting Initiative, Sustainability Accounting Standards Board (SASB) and the United Nation’s Task Force on Climate-related Financial Disclosures. Interdisciplinary research could contribute to bringing about a harmonization and standardization of sustainable corporate reporting based on sound principles. 

On short-termism, the European Commission’s DG Justice and Consumers has just published a “Study on directors’ duties and sustainable corporate governance” it had commissioned from Ernst & Young (EY). The report diagnoses a short-termism problem and puts forward a number of wide-ranging solutions that would transform the way European businesses are run. DG Justice will now embark on a stakeholder dialogue. Although short-termism has been the subject of much academic research in finance, law and economics it remains an underdeveloped subject, with substantial disagreement among scholars. Therefore, the discussion around “short-termism” and the potential policy options are unlikely to be formulated conclusively soon. There is scope for more research in law, finance, economics, history and political science to push these ideas further and to productively interact with policy makers and practitioners.

Regarding corporate purpose, some Member States have reformed company law to allow businesses to make stronger commitments to behave responsibly. In 2016 Italy transplanted the U.S. “Benefit Corporation” statute to include a broader social purpose in company statues. In 2019 France passed the “Loi PACTE” that introduced the “société à mission”. Danone was the first CAC40 company to acquire this status in 2020. These examples provide an opening for other EU Member States to take similar initiatives. Scholars from law, finance, economics and political science have begun to study these developments.

On competition, the European Commission has very recently voiced concerns that the US-tech giants have become “too big to care”. Commissioner Breton just announced that the EU wants to give itself the power to potentially break up the European operations of big technology companies should they fail to protect privacy and data integrity, and should they monopolize markets by exploiting their big data tools.[6] The forthcoming Digital Services Act establishes a direct link between technology, competition and media policy. There are also competition questions arising from the increasing market concentration in the asset management industry. The European Commission and the U.S. Federal Trade Commission have raised concerns that common ownership of companies by a few large asset managers could dampen competition and harm consumers.

On ESG, Institutional investors increasingly take environmental, social and governance (ESG) issues into account when making investments in portfolio firms. This can be in the form of direct shareholder engagement or through screening, whereby firms with certain ESG characteristics end up on positive or negative (exclusion) investment lists. ESG investment can also imply the divestment of portfolio firms. As pointed out by Larry Fink, Blackrock Chairman and CEO, in his 2017 letter to the CEOs of portfolio companies, the underlying investment idea is that “Environmental, Social and Governance (ESG) factors […] can provide essential insights into management effectiveness and thus a company's long-term prospects.” ESG investing is set to have a major impact on many portfolio firms. By 2018, more than 2,000 signatories representing over US$80 trillion of assets had signed the UN Principles for Responsible Investment (PRI), a document that commits its signers to consider ESG factors when making investment decisions.

These are just some examples where the theme of responsible capitalism manifests itself. Broader issues include the link between capitalism and democracy (China, Turkey and the Middle East) and the theme of economic and social resilience to natural disasters such as pandemics, the decline in biodiversity, and climate change.

There is some policy work under way in Europe that is rising up to these challenges, most significantly, a 142-page report that has been published in France by the Comité Médicis and Institut Montaigne entitled “Responsible Capitalism: An Opportunity for Europe”.[7] It reports on the findings of a taskforce chaired by Yves Perrier, the CEO of Amundi, the asset manager and Jean-Dominique Senard, the Chairman of the Board of Directors of Renault. It focuses on funding responsible capitalism in Europe, the legal framework for responsible companies, and makes 17 recommendations. It calls for a New Deal between business and Nations. 

Queries, suggested inclusions and other ideas?

Contact Marco Becht

Fellow, Research Member, Institutional Member, Board Member

Professor of Finance and the Goldschmidt Professor of Corporate Governance

The Oxford Dictionary defines capitalism as “an economic system in which a country’s businesses and industry are controlled and run for profit by private owners rather than by the government”. Capitalism is the system we live in and it is the system that has been adopted by the member countries of the former Soviet Union and by China, following the market reforms introduced by Deng Xiaoping. There is almost no country today that has not organized its economy around market exchange and private property. But Capitalism comes in different forms and today it is facing a major crisis.

In the last two decades we have witnessed the near collapse of the global financial system, a falling labour income share and a rise in inequality.[1] We are no longer talking about climate change and pollution, but about climate crisis and ecological collapse. Yet, the car industry recently produced Dieselgate and clean long-haul air transport is not yet in sight. Fossil fuel companies continue to frack and explore. A handful of tech-giants are dominating the internet and threaten to replace or control what remains of the independent press. In 2020 the Covid-19 pandemic further exposed and accentuated the failings of the capitalist system. The rise in Populism and disenchantment with Globalization are undermining the post WWII free-market order.

The United Nations has taken an early lead in formulating a new vision to reform Capitalism, emphasizing responsibility over free initiative. In 2005 the then United Nations Secretary-General Kofi Annan initiated the development of Principles for Responsible Investment (PRI).[2] Since the PRI were published in 2006 the number of signatories has grown from 63 to 3038 in 2020, representing a combined 103 $US trillion under management. In his 2016 letter to shareholders, the CEO and founder of the World’s largest asset manager, BlackRock, stated that “over the past several years, I have written to the CEOs of leading companies urging resistance to the powerful forces of short-termism afflicting corporate behavior”.[3] In December 2017 a coalition of large institutional investors launched Climate Action 100+ to collectively engage with the World’s largest greenhouse gas emitters. In 2018 Larry Fink urged CEOs to recognise that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”[4]

With the whole world gradually embracing PRI, the US corporate establishment at last shifted tack in 2019 and joined the responsible capitalism bandwagon, with the Members of the United States Business Roundtable making a first commitment to redefine the purpose of business in society. The CEOs of 181 of the largest corporations issued a statement agreeing that business should no longer be run purely for profit, but in the interest of customers, employees, suppliers, communities and shareholders. In an editorial the Financial Times commented “Reinventing capitalism for the long-term is a far from easy task. … Adding the label ‘purpose’ on to existing corporate models will not be enough.”[5]

How can we reform capitalism, so that company bottom-lines become “people, planet, profit”? Policy makers and many companies in Europe have already started to embrace this challenge. A number of initiatives are under way at all levels, but so far, these various initiatives remain uncoordinated, many lack ambition, while others are misguided. In particular there is an acute lack of input from academic researchers in the social sciences. 

On climate, the new European Commission has announced a “New Green Deal” and is committed to continue the work on “Sustainable Finance” started under President Junker. However, the route it has adopted departs from established policies. DG Financial Services did not delegate the task of developing an integrated reporting framework to the International Financial Reporting Standards (IFRS) but proposed its own taxonomy, initially limited to the environment. There are parallel and potentially rival initiatives at a global level, including the Global Reporting Initiative, Sustainability Accounting Standards Board (SASB) and the United Nation’s Task Force on Climate-related Financial Disclosures. Interdisciplinary research could contribute to bringing about a harmonization and standardization of sustainable corporate reporting based on sound principles. 

On short-termism, the European Commission’s DG Justice and Consumers has just published a “Study on directors’ duties and sustainable corporate governance” it had commissioned from Ernst & Young (EY). The report diagnoses a short-termism problem and puts forward a number of wide-ranging solutions that would transform the way European businesses are run. DG Justice will now embark on a stakeholder dialogue. Although short-termism has been the subject of much academic research in finance, law and economics it remains an underdeveloped subject, with substantial disagreement among scholars. Therefore, the discussion around “short-termism” and the potential policy options are unlikely to be formulated conclusively soon. There is scope for more research in law, finance, economics, history and political science to push these ideas further and to productively interact with policy makers and practitioners.

Regarding corporate purpose, some Member States have reformed company law to allow businesses to make stronger commitments to behave responsibly. In 2016 Italy transplanted the U.S. “Benefit Corporation” statute to include a broader social purpose in company statues. In 2019 France passed the “Loi PACTE” that introduced the “société à mission”. Danone was the first CAC40 company to acquire this status in 2020. These examples provide an opening for other EU Member States to take similar initiatives. Scholars from law, finance, economics and political science have begun to study these developments.

On competition, the European Commission has very recently voiced concerns that the US-tech giants have become “too big to care”. Commissioner Breton just announced that the EU wants to give itself the power to potentially break up the European operations of big technology companies should they fail to protect privacy and data integrity, and should they monopolize markets by exploiting their big data tools.[6] The forthcoming Digital Services Act establishes a direct link between technology, competition and media policy. There are also competition questions arising from the increasing market concentration in the asset management industry. The European Commission and the U.S. Federal Trade Commission have raised concerns that common ownership of companies by a few large asset managers could dampen competition and harm consumers.

On ESG, Institutional investors increasingly take environmental, social and governance (ESG) issues into account when making investments in portfolio firms. This can be in the form of direct shareholder engagement or through screening, whereby firms with certain ESG characteristics end up on positive or negative (exclusion) investment lists. ESG investment can also imply the divestment of portfolio firms. As pointed out by Larry Fink, Blackrock Chairman and CEO, in his 2017 letter to the CEOs of portfolio companies, the underlying investment idea is that “Environmental, Social and Governance (ESG) factors […] can provide essential insights into management effectiveness and thus a company's long-term prospects.” ESG investing is set to have a major impact on many portfolio firms. By 2018, more than 2,000 signatories representing over US$80 trillion of assets had signed the UN Principles for Responsible Investment (PRI), a document that commits its signers to consider ESG factors when making investment decisions.

These are just some examples where the theme of responsible capitalism manifests itself. Broader issues include the link between capitalism and democracy (China, Turkey and the Middle East) and the theme of economic and social resilience to natural disasters such as pandemics, the decline in biodiversity, and climate change.

There is some policy work under way in Europe that is rising up to these challenges, most significantly, a 142-page report that has been published in France by the Comité Médicis and Institut Montaigne entitled “Responsible Capitalism: An Opportunity for Europe”.[7] It reports on the findings of a taskforce chaired by Yves Perrier, the CEO of Amundi, the asset manager and Jean-Dominique Senard, the Chairman of the Board of Directors of Renault. It focuses on funding responsible capitalism in Europe, the legal framework for responsible companies, and makes 17 recommendations. It calls for a New Deal between business and Nations. 

Queries, suggested inclusions and other ideas?

Contact Marco Becht

Fellow, Research Member, Institutional Member, Board Member

Professor of Finance and the Goldschmidt Professor of Corporate Governance

Topic Contributors

Professor Jesse Fried

view

Research Member

Professor of Law

from Harvard Law School

Professor  Rajna Gibson Brandon

view

Research Member

Professor of Finance

from University of Geneva

Professor Luc Renneboog

view

Research Member

Professor of Corporate Finance

from Tilburg University

Professor Laura Starks

view

Research Member

Seay Regents Chair of Finance

from McCombs School of Business

Professor Vyacheslav Fos

view

Research Member

Associate Professor of Finance and Hillenbrand Family Faculty Fellow

from Boston College

Professor Alex Edmans

view

Fellow, Research Member

Professor of Finance

from London Business School

Professor Yaniv Grinstein

view

Research Member

Professor/ Adjunct Professor

from IDC Herzliya and Cornell University

Professor Sean Griffith

view

Research Member

T.J. Maloney Chair and Professor of Law

from Fordham University School of Law

Professor Laura Starks

view

Research Member

Seay Regents Chair of Finance

from McCombs School of Business

Professor Oliver Hart

view

Fellow, Research Member

Lewis P. and Linda L. Geyser University Professor

from Department of Economics, Harvard University

Professor Patrick Bolton

view

Fellow, Research Member

Barbara and David Zalaznick Professor of Business

from Columbia Business School

Professor Miguel Ferreira

view

Research Member

Banco BPI Professor of Finance

from Campus de Campolide

Professor Michal  Barzuza

view

Research Member

Nicholas E. Chimicles Research Professor of Business Law and Regulation

from UVA Law

Professor Alexander Ljungqvist

view

Research Member

Stefan Persson Family Professor of Entrepreneurial Finance

from Stockholm School of Economics

Professor Martijn Cremers

view

Research Member

Bernard J. Hank Professor of Finance

from University of Notre Dame

Professor Randall Morck

view

Research Member

Stephen A. Jarislowsky Distinguished Chair in Finance

from School of Business, University of Alberta

Professor Christian Leuz

view

Fellow, Research Member

J. Sondheimer Professor of International Economics, Finance and Accounting

from The University of Chicago - Booth School of Business

Professor Erik Vermeulen

view

Research Member

Professor of Business & Financial Law

from Tilburg University

Professor Luigi Zingales

view

Fellow, Research Member

Robert C. McCormack Professor Entrepreneurship & Finance

from University of Chicago, Booth School of Business

Professor Anjan Thakor

view

Research Member

Director of Doctoral Programs & CFAR and John E. Simon Professor of Finance

from John M. Olin School of Business, Washington University, St. Louis

Professor (em.) Klaus Hopt

view

Fellow, Research Member

Emeritus Professor

from Max Planck Institute for Comparative and International Private Law

Professor Jennifer Hill

view

Research Member

Bob Baxt AO Chair in Corporate and Commercial Law

from Monash University

Professor Karin Thorburn

view

Research Member

Professor of Finance

from Norwegian School of Economics

Professor Joseph McCahery

view

Research Member

Professor of International Economic Law and Professor of Financial Market Regulation

from Tilburg University Faculty of Law and Tilburg Law and Economics Center

Professor Alessio Pacces

view

Research Member

Professor of Law and Finance

from Amsterdam Law School and Business School, University of Amsterdam

Professor  Zacharias Sautner

view

Research Member

Professor of Finance

from Frankfurt School of Finance & Management

Professor Pedro Matos

view

Research Member

John G. Macfarlane Family Chair - Professor of Business Administration (Finance)

from Darden School of Business, University of Virginia

Professor Rui Albuquerque

view

Research Member

Professor of Finance

from Boston College

Professor Bernard Yeung

view

Research Member

Stephen Riady Distinguished Professor and Dean

from National University of Singapore

Professor Mark Roe

view

Fellow, Research Member

David Berg Professor of Law

from Harvard Law School

Professor Luzi Hail

view

Research Member

Professor of Accounting

from The Wharton School, University of Pennsylvania

Professor B. Espen Eckbo

view

Research Member

Tuck Centennial Professor of Finance

from Tuck School of Business at Dartmouth

Professor Viral Acharya

view

Fellow, Research Member

C.V. Starr Professor of Economics

from Leonard N. Stern School of Business, New York University

Professor  Edward Rock

view

Fellow, Research Member

Martin Lipton Professor of Law

from NYU Law

Dr. Hao Liang

view

Research Member

Assistant Professor of Finance; BNP Paribas Fellow

from Singapore Management University, Lee Kong Chian School of Business

Professor Joseph McCahery

view

Research Member

Professor of International Economic Law and Professor of Financial Market Regulation

from Tilburg University Faculty of Law and Tilburg Law and Economics Center

Professor John Coffee

view

Fellow, Research Member

Adolf A. Berle Professor of Law

from Columbia Law School

Professor Holger Spamann

view

Research Member

Professor of Law

from Harvard Law School

Professor William Bratton

view

Research Member

Nicholas F. Gallicchio Professor of Law Emeritus

from University of Pennsylvania Carey Law School

Professor Ulrich Hege

view

Research Member

Professor and Vice President

from Toulouse School of Economics

Professor Dirk Hackbarth

view

Research Member

Professor of Finance

from Boston University

Professor Mariassunta Giannetti

view

Research Member

Professor of Finance

from Stockholm School of Economics

Professor Marco Pagano

view

Fellow, Research Member

Professor of Economics, Facoltà di Economia

from Università di Napoli Federico II

Professor  Steven Davidoff Solomon

view

Research Member

Professor of Law

from University of California, Berkeley School of Law

Professor Colin Mayer

view

Board Member, Fellow, Research Member

Peter Moores Professor of Management Studies

from Saïd Business School, University of Oxford

Professor Paul Davies

view

Fellow, Research Member

Senior Research Fellow

from Centre for Commercial Law, Harris Manchester College, University of Oxford

Prof. Ian Appel

view

Contributor

Assistant Professor

from Boston College

Professor  Zacharias Sautner

view

Research Member

Professor of Finance

from Frankfurt School of Finance & Management

Professor Marc Goergen

view

Research Member

Professor of Finance

from IE Business School

Professor Mike Burkart

view

Fellow, Research Member

Professor of Finance

from London School of Economics and Political Science

Professor Jill Fisch

view

Board Member, Research Member

Saul A. Fox Distinguished Professor of Business Law

from University of Pennsylvania Law School

Professor Amil Dasgupta

view

Research Member

Professor of Finance

from London School of Economics

Professor Joseph McCahery

view

Research Member

Professor of International Economic Law and Professor of Financial Market Regulation

from Tilburg University Faculty of Law and Tilburg Law and Economics Center

Prof. Hannes Wagner

view

Research Member

Associate Professor

from Bocconi University

Professor Paolo Volpin

view

Research Member

Acting Dean and Professor of Finance

from Cass Business School, Faculty of Finance

Professor Pedro Matos

view

Research Member

John G. Macfarlane Family Chair - Professor of Business Administration (Finance)

from Darden School of Business, University of Virginia

Professor Raghuram Rajan

view

Fellow, Research Member

Joseph L. Gidwitz Distinguished Service Professor of Finance

from University of Chicago