March 04, 2007
Book Review--The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda
by Bill Baue
This book introduces a series of new concepts such as the civil economy, the circle of
accountability, and the capitalist manifesto that harness capitalism toward social purpose.
In May 2005, GE
launched its Ecomagination initiative, a
development many consider to have cemented corporate sustainability as a core business
strategy--eclipsing the trend of companies adopting corporate social responsibility (CSR) as an
add-on. The New Capitalists (Harvard Business School Press 2006) explains how this
development also illustrates an even more elemental trend. The book traces the event to its roots
in shareowner activism by an "obscure coalition of Catholic nuns [who] argued that environmental
responsibility would be good for GE's bottom line." This coalition, operating under the umbrella
of the Interfaith Center on Corporate Responsibility (ICCR--characterized as "the single most potent source of investor
activism" in the US) exemplifies the emerging power of "citizen investors" who are helping create a
Civil economy, the term coined by authors Stephen Davis,
founder of corporate governance analyst firm Davis Global Advisors, Jon Lukomnik, former New York City
Deputy Comptroller, and David
Pitt-Watson, former CEO of Hermes Focus Asset Management,
mirrors civil society. Nongovernmental organizations form the backbone of civil society by holding
governments accountable to society. A "circle of accountability" circumscribes the civil economy,
which is populated by the true owners of companies--you and me. The financial elite used to be the
primary owners of stock in companies, but now more than half the US population effectively owns
companies through pension funds and mutual funds. This widespread ownership effectively
democratizes the economy.
"This transformation from conventional to civil economy is not
merely what some hope will happen," write the authors. "It is happening, today."
"Whether it persists and in what direction it evolves is of course open to question," they
continue. "But neither corporate managers nor investors nor involved citizens can ignore it."
At the heart of the circle of accountability is a "capitalist manifesto" posited by the
authors, echoing the Communist Manifesto Karl Marx proposed as the system that would
ultimately displace capitalism. The authors propose their theory of "new" capitalism fulfills the
broken promise of traditional unbridled capitalism by encircling the economy in accountability.
They suggest that we are entering the era of a new capitalist ecosystem.
"In a nutshell,
the global market ideal implicit in a civil economy is this: institutional owners accountable to
their savers push corporations toward sustainable prosperity through responsible management," the
The capitalist manifesto encompasses ten rules. The first: "be
profitable--create value." This represents a reformulation of the late Milton Friedman's infamous
dictum that the "social responsibility of business is to maximize its profits" to "[C]orporations
should seek to maximize the value they generate for their shareowners."
"What we are
arguing is consistent both with the view of Milton Friedman--that the interests of a company are
those of its shareowners--and with the view of those who argue that companies should be more
socially responsible," the authors suggest. "Society and shareowners are becoming one and the
Rules seven ("treat customers, suppliers, workers, and communities fairly") and
eight ("seek appropriate regulations") help explain the distinction between maximizing profit and
"Companies should support voluntary and statutory measures that minimize
externalization of costs to the detriment of society at large or allow an unfair and opaque
competitive advantage," the authors state under rule eight.
Profit maximization encourages
the maximization of externalizations--"let society foot the bill for the impacts of pollution."
The overlap of interests between shareowners and society in the civil economy encourages companies
to "internalize" (or take accountability for) their adverse social and environmental impacts as a
way of maximizing overall value.
"Companies should behave ethically, having regard for
their impact on the environment and society as a whole," the authors state in their discussion of
rule seven, underscoring this point.
The book ends with "action memos"--to corporate
directors and executives, institutional investors, individual investors, analysts, advisers, and
auditors, civil economy groups, politicians and policy makers, and economists and researchers--for
fulfilling the new capitalist agenda. Such actions range from corporations making board elections
meaningful by implementing majority rule and modernizing disclosure by adopting the Global
Reporting Initiative (GRI)
Sustainability Reporting Guidelines to creating a new breed of civil economists.
civil economy . . . explains a new and broader motivation for company activity, combining the
profit motive with respect for wider social goals," the authors conclude. "Today the challenge is
to help new capitalists better understand how the genius of the giant corporation we all co-own can
be vehicles to achieve social purpose."
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