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Social capitalism’s proponent, Sekhar Institute and PETRA Group chairman Datuk Vinod Sekhar, maintains that it is true capitalism – it harnesses the intrinsic greed in all of us to create wealth on a sustainable basis. It is in effect the recognition of the innate nature of people to want more but to build sustainable wealth by ensuring that society develops in tandem and growing the very market required for this to happen. In other words, give people more money and you can make more money from them. It is nurturing and tending carefully to the goose that lays the golden egg rather than exploiting it to death by working it too much for too little. “I want your money but I want you to make it first before I take it from you,” says Vinod.

The first thing to know and understand about social capitalism is that it is grounded on capitalism, not socialism. The term “social” denotes instead a concern for society and others besides shareholders who also inhabit this one earth and depend on it for a livelihood. But the root idea of social capitalism is still entrenched in capitalism – greed if you will for the human body and soul to satisfy a craving for more. But that must not come at the cost of destroying the asset which produces the wealth in the first place.

Google “social capitalism” together and you won’t get much – instead, you get a term called social capital. No, this has got nothing to do with social capitalism. Social capital, broadly defined, is used to describe collective often intangible assets such as shared beliefs and values, social interactions, trust between individuals and groups, individual and institutional relationships, networks, groups and so on which act for mutual benefit. These are necessary prerequisites for teamwork in an endeavour and to build enterprises based on common values. While social capital is relevant in a discussion of social capitalism, it is unrelated to social capitalism as a concept.

Next, it has nothing to do with corporate social responsibility or CSR which has come to denote a practice among companies that allocates time and resources to further social aims and is proudly proclaimed in their annual reports in terms of hours spent and money used. It may be part of social capitalism but that’s not the total picture. As Vinod explains, CSR is not it, it is about changing the lifeblood of the company to incorporate social responsibility into the fabric of the company, into its operations, in the way it does things, believing it is good business.

For the longest time, for perhaps the last 50 or so years, companies have operated on one basic principle, espoused by Nobel-prize winning monetary economist Milton Friedman: “The sole responsibility of a company is to its shareholders. As such, the goal of the firm is to maximize returns to shareholders.” That set the stage for a mad rush by companies for profits to reward shareholders. The people who benefited from this were shareholders – and top management which was generously incentivised to produce the profits for the shareholders under the holy grail of business at that time. In his 1970 article, The Social Responsibility of Business is to Increase its Profits¹, Friedman says: “…there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” But then there are no free markets because none are so large and have an infinite number of participants. Instead, many firms have close to monopoly power and the ability to dictate prices and thus maximise profits which contributed to the large income gaps seen in recent times.

Lately, this theory seems to have been substantially debunked just as Friedman’s other theory, which stated that inflation increases with money supply, was during the World Financial Crisis years of 2007-9. Then, inflation remained low despite a huge injection of money into the system to reflate flagging economies around the world. It has been replaced by a more compassionate form of capitalism – stakeholder capitalism – which is probably closer to social capitalism than anything else but still not quite it. In a Harvard Business Review article last year, Making Shareholder Capitalism a Reality², the authors argue: “Stakeholder capitalism, a popular management theory in the 1950s and ‘60s that focused on the needs of all constituents, not just shareholders, has been poised to make a comeback since weaponized financial instruments brought down the economy in 2008. Now, spurred by the alarming climate crisis and increasing social challenges such as rising inequality, the movement is gathering additional steam. Increasingly, there’s a sense among business leaders that the prevailing ideology of putting shareholders above everyone else — which has reigned for the past 40 years — needs a serious update.” The basic premise is that enterprise must go beyond shareholder satisfaction to take into account the needs of all stakeholders beyond just the shareholders – customers, employees, society, the public, the environment, human rights etc. Stakeholder capitalism is about a return to conscience for business – good conscience encourages companies and businesses to think about everyone in and out of the value chain and to develop wealth without destroying the environment for short-term gains.

Now, here’s the difference – social capitalism is not about conscience. It is the belief that acting in a way to create wealth for the long term in a sustainable manner is the only true capitalism. In that sense, social capitalism is stakeholder capitalism, compassionate capitalism, CSR, environmental, social and corporate governance (ESG) considerations and more. It is the plain and clear recognition that true capitalism encompasses all of these and recognises the basic greed in human nature. As Vinod puts it, the greed is tempered by the realisation that social capitalism, in the long run, is the only way to do business sustainably and without any guilt. “Capitalism is about the growth of society itself and is strengthened through society. ESG does not say how it is good for you. You must make money- if not society crumbles.” At the heart of social capitalism is the requirement that everyone must have their needs taken care of – the wealth within society ensures that this is possible. They must have a roof over their heads, enough food and basic necessities and access to education to get ahead.

“If you want more, be enterprising and make money, then go and work for it, work harder, be enterprising. If you want steak instead of chicken, broccoli instead of cabbage if you want mushroom soup instead of vegetable stock, go work harder, make money, rise. Society must be responsible for a minimum, after that it’s a free-for-all. At the end of the day, it can’t be a handout.”

And the evidence indicates a caring company does better. A McKinsey & Co article written in November last year titled The Case for Stakeholder Capitalism³ said: “…there is growing evidence that companies that take a long-term view—and stakeholder capitalism requires that—perform better. In a study that looked at 615 large- and mid-cap US publicly listed companies from 2001–15, the McKinsey Global Institute found that those with a long-term view outperformed the rest in earnings, revenue, investment, and job growth. Other McKinsey research concluded that companies with strong environmental, social, and governance norms recorded higher performance and credit ratings through five factors: top-line growth, lower costs, fewer legal and regulatory interventions, higher productivity, and optimized investment and asset utilisation.

Now, did paying attention to stakeholders do this or sticking to good business practice achieve the results? Social capitalism postulates that it is the incorporation of good business practices for the sustainable creation of wealth over the long term which achieved it – it goes beyond stakeholder capitalism to recognise that all these and more are good business practices.

In practical terms, it requires enlightened leadership which recognises the strength of social capitalism within companies and all enterprises. It’s about how staff are treated, what is done to upgrade skills, planning a path towards long-term development of employees and stakeholders, equal and equitable treatment, inclusiveness and a lot more which will produce a conducive environment for creating wealth – for everyone.

One of the initiatives that Sekhar Institute will undertake in furtherance of social capitalism is to grow the Good Capitalism Forum which will provide a meeting place as well as an exchange for ideas on how to further the concepts of social capitalism. We will engage in debate and dialogue, recognising that much of the solution will be unique to each country and cannot be imposed from without. When you educate and lift, you enable people to rise above poverty and other limitations. In its wake will come democracy and a better life. As Vinod says: “Social capitalism is about that little bit of hope of upliftment, of economic opportunity and of sustainable wealth creation.”

References:

1. The Social Responsibility of Business is to Increase its Profits -The New York Times Magazine September 13, 1970
2. Making Stakeholder Capitalism a Reality – Harvard Business Review, January 22, 2020
3. The case for stakeholder capitalism – McKinsey and Company, November 12, 2020
4. Where companies with a long-term view outperform their peers – McKinsey Global Institute, Feb 8, 2017
5. Five ways that ESG Creates Value – framework – McKinsey and Company, Nov 14, 2019