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The remedies for capitalism

Mon 25 April 2011

, Paul Polman, Unilever/McKinsey


It is a sign of the world in which we live that the word ‘crisis’ should appear so often in the introduction to Dominic Barton’s well-argued critique of capitalism. But what we have experienced over recent years is not so much a crisis of capitalism as a crisis of ethics, Unilever chief Paul Polman says.

As Dominic Barton acknowledges, capitalism itself remains the ‘greatest engine of prosperity ever devised.’ The issue, to pursue the analogy, is that maintenance of the financial engine has too often been left in the hands of young, untrained apprentices.

 

The central thesis of the article is that the ‘short-termism’ of so much modern business—‘quarterly capitalism’—lies at the heart of many of today’s problems.

No quarterly reporting
I agree and have said so many times, occasionally to my cost. At Unilever, words have been backed with action. We have aligned management incentives for the long term and invested heavily in R&D to build our pipeline of innovations. In addition, we have moved away from quarterly profit reporting; since we don’t operate on a 90-day cycle for advertising, marketing, or investment, why do so for reporting?

Resisting the game
And as Dominic Barton acknowledges, we have also been among those companies ‘to resist playing the game’ when it comes to issuing guidance. The share price may have fallen on the day we announced an end to guidance but is now 35 percent higher. Nothing in the intervening two years has persuaded me that this was the wrong thing to do. We will therefore go on resisting.

Prescriptions for change

For all these reasons, it is difficult to argue with Dominic Barton’s prescriptions for change—management incentives that encourage a focus on the long term, a broader form of stakeholder capitalism, and stronger, better-informed boards of directors.

These will all go a long way to addressing the problems of short-term capitalism.

Different approach
They are necessary. But they are not sufficient. Changes in policy will mean little if not accompanied by changes in behavior. That’s why we need a different approach to business—a new model led by a generation of leaders with the mind-set and the courage to tackle the challenges of the future.

Continue Paul Polman’s response to Dominic Barton’s essay Long Term Capitalism here


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