Making our economic system socially responsible.

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Gary Harkin.

Reinforcing the view that change is in the air in regard to how big business interfaces with the wider community, in August 2019, the US Business Roundtable, an important assembly of leading American business organisations, published The Statement on the Purpose of a Corporation, signed by 181 influential CEOs.

It could be argued that this publication upturns decades of business orthodoxy with a big swing towards a possible new order. Is this the beginning of a new ‘Social Capitalism’ in the USA?

The underlying tone of The Statement on the Purpose of a Corporation was a radical departure from the past. It would represent apostasy for some capitalists, hard-nosed business people and some politicians. Its opening paragraph stated:

Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment, and economic opportunity for all. 

These words are at odds with the thought of Milton Friedman the US Nobel laureate whose economic thinking about capitalism and business exercised considerable influence from the 1970s. The Friedman doctrine states ‘there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits’. In other words, Friedman thought that the first and only rule of business is to increase the wealth of shareholders. If taken literally, this paragraph stands in stark contract measured against the experience of most people, and the slow rate of wage growth.

The Statement on the Purpose of a Corporation expresses the widening recognition that businesses have social obligations not just to shareholders, but also to their workforce and suppliers, as well as their societies and community wellbeing.   

This demand for greater responsibility and accountability has been graphically exemplified in Australia by the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Royal Commission was a devastating critique of the scandal-ridden financial institutions. What change is finally achieved is yet to be determined.

What then are the signs of change going on in big business? Here are some facts to ponder.

How are businesses embracing social responsibilities?

A 2016 Harvard University study found that 51% of US respondents between the ages of 18 and 29 did not support capitalism; a third, surprisingly for the USA, favoured ‘socialism’. Presumably most had in mind more equitable opportunities and social services such as exist in northern Europe, Canada or Australia. These university students will be among the leaders of tomorrow.

The Australian Council of Superannuation Investors in September 2019 published the results of its annual survey of Australian CEO remuneration for the 2018-19 financial year, which showed that the top three CEOs were paid respectively, $23.88m, $23.86m and $19.02m. The immediate media response to this news was characterised by revulsion and a clear view that such remuneration is quite excessive and immoral.

Compare the CEO salaries with average full-time earnings in Australia of $85,010, along with the anecdotal data we all hear of people being paid around $20 per hour ($39,000 a year full-time earnings). Although the government likes to quote the average wage at $85,000 a year, that is for full-time, total earnings including penalty rates. However people on very higher salaries skew the averages upwards. In addition, earnings from investments, shares etc. are not included in these statistics. If you include the 32% of people working part time, the average remuneration drops to $62,000. 

But if you look at the wages of someone half way up the income scale, i.e. with as many earning more than you and an equal number earning less, i.e. the median wage, it is just $55,000, according to Treasury. That is why so many people are feeling under financial pressure, especially with the inflated cost of housing.

In the US business scene, like Australia’s, economic growth is poor, inequality is growing, governance is often lamentable and the environment is suffering. Enter Elizabeth Warren, a US senator and former Harvard law professor who is running for the US presidency in 2020. She promises to bring about ‘big, structural change’, towards giving power back to working people, away from big business and the wealthy. She has become known in her Democratic Party for her focus on just such a legislative program if she were to win the White House next year.

While many will view news of The Statement on the Purpose of a Corporation with scepticism, they must acknowledge at least that change is in the air. If this trend amounts to a reweighting of parameters such as social equality, environmental issues and governance in the big business space, then significant progress may be underway.

Gary Harkin is a member of SPC.
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