Consider the following questions and share your thoughts or provide a response

• What are some of the challenges with our prevailing views on capitalism as proposed by the various authors referenced in Leavys article? What is at the core of these challenges?
• What are your views, does capitalism need fixing?
• What are some potential levers for change highlighted in this article

Getting back to what matters creating long-term economic and social value Brian Leavy It is only through a sense of purpose that companies can realize their potential. It is their raison d'tre that animales employees and inspires them to turn purpose into reality. In recent years many companies have sold out to the financial community in a never-ending quest to drive their stock price higher. Once a company does so, it is extremely difficult to regain a sense of purpose - Bill George, author and former CEO of Medtronic.[1] Brian Leavy, is the AIB Professor of Strategic Management at Dublin City University Business School (brian.leavy@dcu.ie), the co-author of Strategic Leadership: Governance & Renewal (Palgrave Macmillian, 2009) and a Strategy & Leadership Contributing Editor The only trouble with Capitalism is capitalists. They're too damned greedy - Herbert Hoover, 31st President of the United States. n 1989, the American political scientist Francis Fukuyama, in his essay, "The end of history?"' wondered if, following the collapse of the communist system in Eastern Europe, the world was witnessing the "unabashed victory of economic and political liberalism."[2] Just two decades later, revelations of corporate excesses and the crisis in the global financial system have now provoked fundamental questions about the longer term viability of the capitalist economic model, and about the purposes and practices of our business corporations that are so central to making it work. This "Masterclass" compares three complementary sets of insights into what is fundamentally wrong with the current model of capitalism, and what will be needed to put it right: In Fixing the Game, Roger Martin, Professor and Dean of the Rotman School of Management at the University of Toronto, tracks the evolution of "shareholder capitalism" during the latter part of the 20th century and explains why it has turned out to be so detrimental. He argues that it is time to put the customer back at the center of the picture.[3] In their manifesto "Creating shared value" in Harvard Business Review, noted strategists Michael Porter and Mark Kramer show business leaders how to restore credibility to capitalism by adopting a view of corporate social responsibility that sees the relationship between business and society as a 'win-win' opportunity to create new wealth based on addressing society's deepest needs.[4] In Higher Ambition, Michael Beer, emeritus professor at Harvard Business School and his co-authors explain why business leaders who simultaneously create economic and social value in a highly authentic and integrated way tend to be the most successful at sustaining high performance over time.[5] Fixing what's broken - a new era of "customer-driven" capitalism According to Roger Martin in Fixing the Game, any reassessment of modern capitalism needs to start with some understanding of how it has evolved over time.[6] The rise of professional management, and the emergence of managerial capitalism," was the first major transition in the nature of modern capitalism, and rate of expansion achieved by the world's most advanced economies would have been impossible without it. However, by the early 1970s, many saw cause for concern. In his Pulitzer Prize-winning classic, The Visible Hand: The Managerial Revolution in American Business, business historian Alfred Chandler, highlighted the extent to which the "visible hands of corporate management had already replaced the "invisible hand" of the market as the primary resource allocation mechanism in leading capitalist economies. [7] Around the same time, in a now famous essay published in an obscure journal, Michael Jensen and William Meckling, raised the concern that in the separation of ownership from control, shareholders were in danger of getting short-changed as managers looked to advance their own professional interests in the running of the firm.[8] Concerns like these helped to usher in the transition to "shareholder capitalism." What was urgently needed, according to Jensen and Meckling, was a way to align the interests of management and shareholders more closely together by significantly increasing the proportion of executive compensation comprised of stock. Over time, according to Roger Martin, the cure turned out to be worse than the disease. To begin with, the evidence for the superiority of the shareholder value movement is unconvincing at best. In 1970, stock-based compensation accounted for less than 1 percent of CEO remuneration. By 2009, it had risen to well over 80 percent in many cases. Yet, while over the period from the early 1930s to the mid-1970s, when managerial capitalism was in the ascendancy, total returns on the S&P 500 were 7.6 percent on a compound annual basis, during the years from 1976 to 2009 when shareholder capitalism was holding sway, the figure was 6.4 percent.[9] So at its best, shareholder capitalism has not been seen to deliver more value to shareholders. At its worst, according to Fixing the Game, "our theories of shareholder maximization and stock-based compensation" have the ability to "destroy" the economy and "rot out the core of American capitalism." The danger arises out of the essential differences between the two markets in which CEOs are expected to deliver results - the "real market" of customers, factories, and products or services, and the "expectations market" of stock exchanges, shareholders and institutional investors. Bad things tends to happen when companies try to make winning in the expectations market their main priority. Since the share price at any point in time represents the collective consensus within the financial markets about the future prospects of a company, shareholder value "has almost nothing to do with the present," warns Martin.[10] So the only "sure way" of increasing shareholder value is to keep raising future expectations. Executives "can't do that indefinitely." While the share price can always be boosted in the short-run, we know now that many of the tactics typically involved, like earnings management. too often came with a heavy price tag over the longer run. This is why, for Martin, a new perspective that returns the primary focus onto the real market is now needed, a perspective he calls "customer-driven capitalism." (For a summary of his specific recommendations, see the sidebar "Healing American capitalism - five positive steps.") Healing American capitalism - five positive steps . Focus. Shifting the focus back to the customer and away from shareholder value, turning primary attention back to the real market and away from the expectations market. Executive compensation. Restoring authenticity to the lives of executives by eliminating stock-based compensation and creating new models that focus executives on real and meaningful goals. Governance. Rethinking the role and structure of boards (board members are themselves agents, not principals - so the current theory concerning boards of directors is "fundamentally flawed" and needs fresh thinking). Regulating market "parasites." Regulating and managing the expectations market more effectively, most notably reining in the activities of the more "parasitical players, like hedge funds, which have a huge vested interest in market volatility The civil foundation. Defining and institutionalizing a more expansive societal goal for business executives - to contribute to strengthening the "civil foundation," and be a force that improves the society in which they live and work. (Adapted from Fixing the Game by Roger Martin (Harvard Business Review Press, 2011.) While CEOs want to succeed with shareholders and customers alike, the order of priority matters. Shareholders tend to do well where the customer is top priority. But customer needs are at risk of being neglected when the shareholders' short-term gratification is favored, to the ultimate detriment of both customer and shareholder. In June 2000, when A.G. Lafley took over as CEO of Proctor & Gamble, the company was in the throes of a crisis that saw its stock price collapse. He attributed the corporate stumble to "an overly ambitious organizational transformation,"led by a predecessor with a very strong shareholder-value orientation, which had "distracted us from running the everyday business with excellence."[11] One of the earliest moves that Lafley made in leading the recovery wastore-enshrine the customer as the company's primary stakeholder, and the shareholders have done very well since. The recent history of Starbucks provides a confirming example.[12] Crucially, as Fixing the Game argues, the real market "produces a positive-sum game for society," where all stakeholders can be better off "as more and more value is created for customers." In contrast, the expectations market is a "gigantic zero-sum game," where wealth is redistributed rather than created, and where gains for one set of stakeholders (investors) are too often seen to come at the expense of others (customers, employees, communities) Perhaps the most famous statement of stakeholder priorities is embedded in the credo" developed by Johnson & Johnson CEO Robert Wood Johnson in 1943 that listed the primary responsibilities of the company as customers first, employees second, the community third and stockholders last. In this real market, according to Johnson, "when we operate according to these principles, the stockholders should realize a fair return."[13] Is there a better way to secure a good alignment between shareholder interests and the priorities of management, and do it in a sustainable fashion? At P&G, one of the ways Lafley sought to do this was to change the primary performance metric for each of the company's main businesses to OTSR (Operating Total Shareholder Returns). This is a "value-creation" measure mainly driven by sales growth, margin improvement and asset efficiency, all of Building a new "shared value relationship between business and society One of the most dangerous and self-defeating consequences of the "shareholder value" first doctrine has been to cause corporate executives to mismanage their social responsibility. Fixing the Game draws our attention to the stark contrast between the exemplary handling of the 1982 Tylenol product-poisoning crisis by J&J, and the disastrous response of British Petroleum to the more recent oil spill catastrophe in the Gulf of Mexico. J&J was applauded for acting quickly to put the interests of its customers and their communities first by pulling all bottles off store shelves, while BP was criticized for its efforts to limit the impact of the cost of damages on the company's shareholders.[15] In their critique of what is currently wrong with the capitalist system, and what needs to be changed, Michael Porter and Mark Kramer propose that the general relationship between business and society be reframed and transformed. One of the legacies of the 'shareholder value" era is that companies are widely perceived to be prospering at the expense of the broader community," and responses such as that of BP to the crisis in the Gulf just seem to reinforce this view.[16] But is there a fundamental conflict between economic efficiency as measured by shareholder value - and social progress - as measured by stakeholder value? According to Porter and Kramer, business and society "have been pitted against each other for too long" in part because of the traditional tendency in neoclassical economic thinking to view corporate social responsibility initiatives in terms of cost and constraint, rather than as wealth-creating opportunities.[17] They believe the purpose of the corporation must be redefined as creating 'shared value," which involves creating economic value in a way that also creates value for society." Their proposal has the potential to "drive the next wave of innovation and growth in the global economy," while offering business its best chance at restoring its legitimacy.[18] In the narrow view of shareholder capitalism, society's bigger challenges in areas like health, education, infrastructure, conservation and poverty, were seen by the business world community to fall largely outside of its responsibility. Porter and Kramer highlight three main ways in which companies can find opportunities to generate new wealth through focusing on some of society's most pressing challenges, and the three are mutually reinforcing: 1. Re-conceiving products and markets. Today, many food companies that traditionally sought to drive consumption through concentrating on taste and quantity are now finding exciting new opportunities to innovate by focusing on the more fundamental need for better nutrition Similar opportunities are opening up in areas like energy and infrastructure. Many of the most exciting are to be found at the bottom of the pyramid" in the emerging economies, like the text messaging, micro-information services that have been developed by companies like Reuters to help raise farmer productivity in rural India. Similar opportunities exist to address traditionally underserved needs even in the more advanced economics, among the low-income communities in the inner cities, for example. 2. Reimagining value chains and redefining productivity. In areas such as energy use and logistics, resource use, procurement, distribution, and employee engagement the congruence between societal progress and productivity in the value chain" is turning out to be "far greater than traditionally believed." For example, Wal-Mart was able recently to generate savings of $200M per annum through eliminating excess LOOOOOO footprint considerably, while Coca Cola is well on target to reduce its worldwide consumption of water by 20 percent by 2016. Hindustan Unilever (HUL) has transformed village life in India through an innovative distribution system that has raised the incomes and living standards of the 45000 female micro-entrepreneurs distributing its products, while reducing the spread of communicable diseases by increasing the access to hygiene products, and J&J has recently saved $250M on health-related costs among its employees, a return of 270 percent on a "wellness program" investment over the 2002-8 period. (19) 3. Development of supportive clusters at the company's locations. Globalization in the shareholder value era led many companies to believe that location no longer mattered, weakening their connections with the communities in which they operate, though there are signs that many leading companies are beginning to reverse this thinking. For example, GE has begun to move some of its manufacturing investment back to the US, while Wal-Mart is increasingly sourcing much of its food produce from local farms near its warehouses, with savings on transportation and inventory costs more than offsetting the lower prices available from industrial farms further from base. Moreover, when a firm takes a lead in working with others to build clusters of related activities in its key locations, it helps to improve its own overall competitive framework. Such industrial clustering "amplifies the connection between its success and its communities' success" and generates a powerful "multiplier effect."[20, 21] Restoring authenticity to the role of corporate management - leading with a higher ambition" As Porter and Kramer argue, "not all profit is equal" and profit involving a social purpose represents a higher form of capitalism - one that will enable society to advance more rapidly while allowing companies to grow even more," resulting in a positive cycle of company and community prosperity, which leads to profits that will endure." Profit pursued in this shared value way also promises to help reverse one of the most dysfunctional tendencies of the shareholder value era highlighted by Roger Martin in Fixing the Game, the seduction of too many corporate leaders into leading inauthentic lives, dedicated to exceeding the expectations of investors whose sole objective was making money, and increasingly disconnected from the communities in which they and their businesses operated. Business and society were much more connected in the decades before the shareholder value movement reached its zenith, and Porter and Kramer urge the corporate world to take the lead in bringing business and society back together" in a way that "reconnects company success with social progress The good news is that this is already happening in some quarters, and with impressive results. This is the central message in Higher Ambition Leadership: How Great Leaders Create Economic and Social Value, which provides evidence-based guidance as to how this generation of business leaders might go about rebuilding the business-society connection.[22] The book, by Michael Beer and his co-authors, is based on the findings of a four-year research program that identified 36 CEOs from across the globe, all of whom shared a "higher ambition" to build institutions capable of simultaneously creating ''superior and lasting economic value" and "superior social value," distinguishing them from more conventional leaders and companies that focus primarily on building financial wealth." [23] A striking example is Doug Conant, the former CEO of Campbell Soup Company, who succeeded in turning the fortunes of the company around and setting it on a path to sustainable performance during his tenure as leader from 2002 to 2011. During the early part of the 1990s, the firm had been one of the top performing companies in the sector worldwide. Then "caught up in the market's obsession with short-term profits," the company embarked on a set of short-sighted decisions designed to bolster or preserve margins, that led it quickly into a vicious downward spiral, first increasing prices until it started losing market share, then reducing costs until the quality of its flagship products became compromised, then cutting the advertising budget, until sales began to plummet, and finally firing people (including 200 from Michael Beer R&D in a single day), until, as Conant describes it, there was "nobody left to do the work" and the whole thing just came crashing down." During this mindless pursuit of shareholder value company shares lost half their value. Hoping urnaround, the board recruited Conant, an industry veteran. Carrying out his own due diligence, Conant saw the potential that continued to lie within the once-great company, and studying closely the top performers in sector, he came to the "surprising conclusion" that "scale was not as important" as the conventional wisdom seemed to suggest. Rather, the outstanding performers, like Wrigley, Hershey and McCormick, tended to have powerful leading brands with the financial resources to support them, and to be in categories with the wind at their backs." They also tended to have strong, dedicated organizations, with a clear performance ethic, where everyone knew what was expected. Based on his analysis, Conant declared that company was going to revive its fortunes by growing its condensed soup business, and the investment community was stunned. It was widely known that the market for Campbell's signature product had been in decline for over twenty years, and that "everybody and their brother had tried to revive it," but Conant refused to be swayed by the critics and doublers. He took up the challenge by declaring his strategic intent "without quite knowing how we are going to do it, then moving forward with determination. More striking still was the distinctive ambition that he set out for the kind of organization that he wanted to build at the company, which he called the "Campbell Success Model." This had two main components, one financial and one social, the first was called "winning in the marketplace" through outperforming peer companies, and the second, "winning in the workplace" through "creating a superior employment experience for each and every employee." As Conant saw it, we had to "win on both fronts" because "if you're not winning in the workplace, you can't win in the marketplace in a sustainable way and be a sustainably good company." Later, he added a third element to the success formula, "contributing to the community." By the end of the decade, this success formula was clearly paying off. The stock was consistently outperforming the Standard & Poor's Packaged Food Index, sales of condensed soup were growing at 5 percent per annum, and the company was a leader in employee engagement and corporate citizenship. Other "higher ambition" leaders were seen to share a similar conviction, As Peter Dunn, CEO of Steak 'n Shake explained: "Creating social value unlocks the dormant creative energies that exist in all of us, which in turn creates outstanding financial results. Conversely, with growing profits, you are able to attract and energize people over time. Creating both social and economic value directly reinforces the primary motivators of people: purpose, autonomy and mastery." Beer and his co-authors believe that the higher ambition leaders featured in their study "have been converging on a distinctive way to lead and manage" that delivers "better and more sustainable results in both economic and social terms."(See box: The practices of higher-ambition leaders Forging strategic identity Strategy development as a fundamental rethinking of the firm's strategic identity, that connects the firm's strategy with the sensibilities and passions of its people, and a perspective that views organizational capability as strategy Building a community of shared purpose Crafting a performance management process around a shared commitment to deliver dramatically higher value to customers, communities and employees as well as shareholders, where business (building economic capital) and organizational (building social capital) objectives are closely linked and diversity is embraced as a true source of potential competitive advantage Leading with "Sisu" (a Finnish word meaning "Gutsy'') Where achieving a higher ambition requires leading in a way that seeks to engage widely, provide the organization with clear strategic focus and a determination to stay the course, and devote huge personal energy into developing future leaders, building and aligning collective leadership at multiple lovels. (Adapted from Higher Ambition Leadership by Michael Beer, Russell Eisenstat, Nathaniel Foole, Tobias Fredberg and Flemming Norrgren (Harvard Business Review Press, 2011) and from "The higher ambition leader" by Nathaniel Foote, Russell Eisenstat and Tobias Fredberg, Harvard Business Review, September, 2011, pp. 95-102.) These CEOs seem to be exemplars of a more authentic form of leadership, more strongly rooted in the real market, with the vision, ambition and commitment to bring the resources and skills of business to addressing some of society's most pressing and challenging problems and creating shared value in the process. It's the kind of leadership that Martin, Porter and Kramer also should find heartening. This "Masterclass" guides executives through three complementary sets of insights into what is fundamentally wrong with the current model of capitalism, and the specific actions that they can take to create long-term economic and social value. In the book Fixing the Game, Roger Martin tracks the evolution of "shareholder capitalism" during the latter part of the 20th century and explains why it has become so detrimental: CEOs are expected to deliver results in both the "real market" (customers, factories, and products or services) and the "expectations market" (stock exchanges, shareholders and institutional investors). The real market "produces a positive-sum game for society." where all stakeholders can be better off was more and more value is created for customers." In contrast, the expectations market is a "gigantic zero-sum game," where wealth is redistributed rather than created. The order of priority does matter. A good alignment between shareholder interests and the priorities of management is possible if the primary performance metric is OTSR (Operating Total Shareholder Returns). This is a "value-creation" measure mainly driven by sales growth, margin improvement and asset efficiency, all of which are "real market" variables under the control of management. In their manifesto "Creating Shared Value" in Harvard Business Review, noted strategists Michael Porter and Mark Kramer show business leaders how to restore credibility to capitalism by adopting a view of corporate social responsibility: Mismanagement of a company's social responsibility in the "shareholder value" era has lead to the broad perception that companies prosper at the expense of the broader community. (Example: BP's oil spill in the Gulf of Mexico.) In contrast, the relationship between business and society can be a 'win-win' opportunity Getting back to what matters creating long-term economic and social value Brian Leavy It is only through a sense of purpose that companies can realize their potential. It is their raison d'tre that animales employees and inspires them to turn purpose into reality. In recent years many companies have sold out to the financial community in a never-ending quest to drive their stock price higher. Once a company does so, it is extremely difficult to regain a sense of purpose - Bill George, author and former CEO of Medtronic.[1] Brian Leavy, is the AIB Professor of Strategic Management at Dublin City University Business School (brian.leavy@dcu.ie), the co-author of Strategic Leadership: Governance & Renewal (Palgrave Macmillian, 2009) and a Strategy & Leadership Contributing Editor The only trouble with Capitalism is capitalists. They're too damned greedy - Herbert Hoover, 31st President of the United States. n 1989, the American political scientist Francis Fukuyama, in his essay, "The end of history?"' wondered if, following the collapse of the communist system in Eastern Europe, the world was witnessing the "unabashed victory of economic and political liberalism."[2] Just two decades later, revelations of corporate excesses and the crisis in the global financial system have now provoked fundamental questions about the longer term viability of the capitalist economic model, and about the purposes and practices of our business corporations that are so central to making it work. This "Masterclass" compares three complementary sets of insights into what is fundamentally wrong with the current model of capitalism, and what will be needed to put it right: In Fixing the Game, Roger Martin, Professor and Dean of the Rotman School of Management at the University of Toronto, tracks the evolution of "shareholder capitalism" during the latter part of the 20th century and explains why it has turned out to be so detrimental. He argues that it is time to put the customer back at the center of the picture.[3] In their manifesto "Creating shared value" in Harvard Business Review, noted strategists Michael Porter and Mark Kramer show business leaders how to restore credibility to capitalism by adopting a view of corporate social responsibility that sees the relationship between business and society as a 'win-win' opportunity to create new wealth based on addressing society's deepest needs.[4] In Higher Ambition, Michael Beer, emeritus professor at Harvard Business School and his co-authors explain why business leaders who simultaneously create economic and social value in a highly authentic and integrated way tend to be the most successful at sustaining high performance over time.[5] Fixing what's broken - a new era of "customer-driven" capitalism According to Roger Martin in Fixing the Game, any reassessment of modern capitalism needs to start with some understanding of how it has evolved over time.[6] The rise of professional management, and the emergence of managerial capitalism," was the first major transition in the nature of modern capitalism, and rate of expansion achieved by the world's most advanced economies would have been impossible without it. However, by the early 1970s, many saw cause for concern. In his Pulitzer Prize-winning classic, The Visible Hand: The Managerial Revolution in American Business, business historian Alfred Chandler, highlighted the extent to which the "visible hands of corporate management had already replaced the "invisible hand" of the market as the primary resource allocation mechanism in leading capitalist economies. [7] Around the same time, in a now famous essay published in an obscure journal, Michael Jensen and William Meckling, raised the concern that in the separation of ownership from control, shareholders were in danger of getting short-changed as managers looked to advance their own professional interests in the running of the firm.[8] Concerns like these helped to usher in the transition to "shareholder capitalism." What was urgently needed, according to Jensen and Meckling, was a way to align the interests of management and shareholders more closely together by significantly increasing the proportion of executive compensation comprised of stock. Over time, according to Roger Martin, the cure turned out to be worse than the disease. To begin with, the evidence for the superiority of the shareholder value movement is unconvincing at best. In 1970, stock-based compensation accounted for less than 1 percent of CEO remuneration. By 2009, it had risen to well over 80 percent in many cases. Yet, while over the period from the early 1930s to the mid-1970s, when managerial capitalism was in the ascendancy, total returns on the S&P 500 were 7.6 percent on a compound annual basis, during the years from 1976 to 2009 when shareholder capitalism was holding sway, the figure was 6.4 percent.[9] So at its best, shareholder capitalism has not been seen to deliver more value to shareholders. At its worst, according to Fixing the Game, "our theories of shareholder maximization and stock-based compensation" have the ability to "destroy" the economy and "rot out the core of American capitalism." The danger arises out of the essential differences between the two markets in which CEOs are expected to deliver results - the "real market" of customers, factories, and products or services, and the "expectations market" of stock exchanges, shareholders and institutional investors. Bad things tends to happen when companies try to make winning in the expectations market their main priority. Since the share price at any point in time represents the collective consensus within the financial markets about the future prospects of a company, shareholder value "has almost nothing to do with the present," warns Martin.[10] So the only "sure way" of increasing shareholder value is to keep raising future expectations. Executives "can't do that indefinitely." While the share price can always be boosted in the short-run, we know now that many of the tactics typically involved, like earnings management. too often came with a heavy price tag over the longer run. This is why, for Martin, a new perspective that returns the primary focus onto the real market is now needed, a perspective he calls "customer-driven capitalism." (For a summary of his specific recommendations, see the sidebar "Healing American capitalism - five positive steps.") Healing American capitalism - five positive steps . Focus. Shifting the focus back to the customer and away from shareholder value, turning primary attention back to the real market and away from the expectations market. Executive compensation. Restoring authenticity to the lives of executives by eliminating stock-based compensation and creating new models that focus executives on real and meaningful goals. Governance. Rethinking the role and structure of boards (board members are themselves agents, not principals - so the current theory concerning boards of directors is "fundamentally flawed" and needs fresh thinking). Regulating market "parasites." Regulating and managing the expectations market more effectively, most notably reining in the activities of the more "parasitical players, like hedge funds, which have a huge vested interest in market volatility The civil foundation. Defining and institutionalizing a more expansive societal goal for business executives - to contribute to strengthening the "civil foundation," and be a force that improves the society in which they live and work. (Adapted from Fixing the Game by Roger Martin (Harvard Business Review Press, 2011.) While CEOs want to succeed with shareholders and customers alike, the order of priority matters. Shareholders tend to do well where the customer is top priority. But customer needs are at risk of being neglected when the shareholders' short-term gratification is favored, to the ultimate detriment of both customer and shareholder. In June 2000, when A.G. Lafley took over as CEO of Proctor & Gamble, the company was in the throes of a crisis that saw its stock price collapse. He attributed the corporate stumble to "an overly ambitious organizational transformation,"led by a predecessor with a very strong shareholder-value orientation, which had "distracted us from running the everyday business with excellence."[11] One of the earliest moves that Lafley made in leading the recovery wastore-enshrine the customer as the company's primary stakeholder, and the shareholders have done very well since. The recent history of Starbucks provides a confirming example.[12] Crucially, as Fixing the Game argues, the real market "produces a positive-sum game for society," where all stakeholders can be better off "as more and more value is created for customers." In contrast, the expectations market is a "gigantic zero-sum game," where wealth is redistributed rather than created, and where gains for one set of stakeholders (investors) are too often seen to come at the expense of others (customers, employees, communities) Perhaps the most famous statement of stakeholder priorities is embedded in the credo" developed by Johnson & Johnson CEO Robert Wood Johnson in 1943 that listed the primary responsibilities of the company as customers first, employees second, the community third and stockholders last. In this real market, according to Johnson, "when we operate according to these principles, the stockholders should realize a fair return."[13] Is there a better way to secure a good alignment between shareholder interests and the priorities of management, and do it in a sustainable fashion? At P&G, one of the ways Lafley sought to do this was to change the primary performance metric for each of the company's main businesses to OTSR (Operating Total Shareholder Returns). This is a "value-creation" measure mainly driven by sales growth, margin improvement and asset efficiency, all of Building a new "shared value relationship between business and society One of the most dangerous and self-defeating consequences of the "shareholder value" first doctrine has been to cause corporate executives to mismanage their social responsibility. Fixing the Game draws our attention to the stark contrast between the exemplary handling of the 1982 Tylenol product-poisoning crisis by J&J, and the disastrous response of British Petroleum to the more recent oil spill catastrophe in the Gulf of Mexico. J&J was applauded for acting quickly to put the interests of its customers and their communities first by pulling all bottles off store shelves, while BP was criticized for its efforts to limit the impact of the cost of damages on the company's shareholders.[15] In their critique of what is currently wrong with the capitalist system, and what needs to be changed, Michael Porter and Mark Kramer propose that the general relationship between business and society be reframed and transformed. One of the legacies of the 'shareholder value" era is that companies are widely perceived to be prospering at the expense of the broader community," and responses such as that of BP to the crisis in the Gulf just seem to reinforce this view.[16] But is there a fundamental conflict between economic efficiency as measured by shareholder value - and social progress - as measured by stakeholder value? According to Porter and Kramer, business and society "have been pitted against each other for too long" in part because of the traditional tendency in neoclassical economic thinking to view corporate social responsibility initiatives in terms of cost and constraint, rather than as wealth-creating opportunities.[17] They believe the purpose of the corporation must be redefined as creating 'shared value," which involves creating economic value in a way that also creates value for society." Their proposal has the potential to "drive the next wave of innovation and growth in the global economy," while offering business its best chance at restoring its legitimacy.[18] In the narrow view of shareholder capitalism, society's bigger challenges in areas like health, education, infrastructure, conservation and poverty, were seen by the business world community to fall largely outside of its responsibility. Porter and Kramer highlight three main ways in which companies can find opportunities to generate new wealth through focusing on some of society's most pressing challenges, and the three are mutually reinforcing: 1. Re-conceiving products and markets. Today, many food companies that traditionally sought to drive consumption through concentrating on taste and quantity are now finding exciting new opportunities to innovate by focusing on the more fundamental need for better nutrition Similar opportunities are opening up in areas like energy and infrastructure. Many of the most exciting are to be found at the bottom of the pyramid" in the emerging economies, like the text messaging, micro-information services that have been developed by companies like Reuters to help raise farmer productivity in rural India. Similar opportunities exist to address traditionally underserved needs even in the more advanced economics, among the low-income communities in the inner cities, for example. 2. Reimagining value chains and redefining productivity. In areas such as energy use and logistics, resource use, procurement, distribution, and employee engagement the congruence between societal progress and productivity in the value chain" is turning out to be "far greater than traditionally believed." For example, Wal-Mart was able recently to generate savings of $200M per annum through eliminating excess LOOOOOO footprint considerably, while Coca Cola is well on target to reduce its worldwide consumption of water by 20 percent by 2016. Hindustan Unilever (HUL) has transformed village life in India through an innovative distribution system that has raised the incomes and living standards of the 45000 female micro-entrepreneurs distributing its products, while reducing the spread of communicable diseases by increasing the access to hygiene products, and J&J has recently saved $250M on health-related costs among its employees, a return of 270 percent on a "wellness program" investment over the 2002-8 period. (19) 3. Development of supportive clusters at the company's locations. Globalization in the shareholder value era led many companies to believe that location no longer mattered, weakening their connections with the communities in which they operate, though there are signs that many leading companies are beginning to reverse this thinking. For example, GE has begun to move some of its manufacturing investment back to the US, while Wal-Mart is increasingly sourcing much of its food produce from local farms near its warehouses, with savings on transportation and inventory costs more than offsetting the lower prices available from industrial farms further from base. Moreover, when a firm takes a lead in working with others to build clusters of related activities in its key locations, it helps to improve its own overall competitive framework. Such industrial clustering "amplifies the connection between its success and its communities' success" and generates a powerful "multiplier effect."[20, 21] Restoring authenticity to the role of corporate management - leading with a higher ambition" As Porter and Kramer argue, "not all profit is equal" and profit involving a social purpose represents a higher form of capitalism - one that will enable society to advance more rapidly while allowing companies to grow even more," resulting in a positive cycle of company and community prosperity, which leads to profits that will endure." Profit pursued in this shared value way also promises to help reverse one of the most dysfunctional tendencies of the shareholder value era highlighted by Roger Martin in Fixing the Game, the seduction of too many corporate leaders into leading inauthentic lives, dedicated to exceeding the expectations of investors whose sole objective was making money, and increasingly disconnected from the communities in which they and their businesses operated. Business and society were much more connected in the decades before the shareholder value movement reached its zenith, and Porter and Kramer urge the corporate world to take the lead in bringing business and society back together" in a way that "reconnects company success with social progress The good news is that this is already happening in some quarters, and with impressive results. This is the central message in Higher Ambition Leadership: How Great Leaders Create Economic and Social Value, which provides evidence-based guidance as to how this generation of business leaders might go about rebuilding the business-society connection.[22] The book, by Michael Beer and his co-authors, is based on the findings of a four-year research program that identified 36 CEOs from across the globe, all of whom shared a "higher ambition" to build institutions capable of simultaneously creating ''superior and lasting economic value" and "superior social value," distinguishing them from more conventional leaders and companies that focus primarily on building financial wealth." [23] A striking example is Doug Conant, the former CEO of Campbell Soup Company, who succeeded in turning the fortunes of the company around and setting it on a path to sustainable performance during his tenure as leader from 2002 to 2011. During the early part of the 1990s, the firm had been one of the top performing companies in the sector worldwide. Then "caught up in the market's obsession with short-term profits," the company embarked on a set of short-sighted decisions designed to bolster or preserve margins, that led it quickly into a vicious downward spiral, first increasing prices until it started losing market share, then reducing costs until the quality of its flagship products became compromised, then cutting the advertising budget, until sales began to plummet, and finally firing people (including 200 from Michael Beer R&D in a single day), until, as Conant describes it, there was "nobody left to do the work" and the whole thing just came crashing down." During this mindless pursuit of shareholder value company shares lost half their value. Hoping urnaround, the board recruited Conant, an industry veteran. Carrying out his own due diligence, Conant saw the potential that continued to lie within the once-great company, and studying closely the top performers in sector, he came to the "surprising conclusion" that "scale was not as important" as the conventional wisdom seemed to suggest. Rather, the outstanding performers, like Wrigley, Hershey and McCormick, tended to have powerful leading brands with the financial resources to support them, and to be in categories with the wind at their backs." They also tended to have strong, dedicated organizations, with a clear performance ethic, where everyone knew what was expected. Based on his analysis, Conant declared that company was going to revive its fortunes by growing its condensed soup business, and the investment community was stunned. It was widely known that the market for Campbell's signature product had been in decline for over twenty years, and that "everybody and their brother had tried to revive it," but Conant refused to be swayed by the critics and doublers. He took up the challenge by declaring his strategic intent "without quite knowing how we are going to do it, then moving forward with determination. More striking still was the distinctive ambition that he set out for the kind of organization that he wanted to build at the company, which he called the "Campbell Success Model." This had two main components, one financial and one social, the first was called "winning in the marketplace" through outperforming peer companies, and the second, "winning in the workplace" through "creating a superior employment experience for each and every employee." As Conant saw it, we had to "win on both fronts" because "if you're not winning in the workplace, you can't win in the marketplace in a sustainable way and be a sustainably good company." Later, he added a third element to the success formula, "contributing to the community." By the end of the decade, this success formula was clearly paying off. The stock was consistently outperforming the Standard & Poor's Packaged Food Index, sales of condensed soup were growing at 5 percent per annum, and the company was a leader in employee engagement and corporate citizenship. Other "higher ambition" leaders were seen to share a similar conviction, As Peter Dunn, CEO of Steak 'n Shake explained: "Creating social value unlocks the dormant creative energies that exist in all of us, which in turn creates outstanding financial results. Conversely, with growing profits, you are able to attract and energize people over time. Creating both social and economic value directly reinforces the primary motivators of people: purpose, autonomy and mastery." Beer and his co-authors believe that the higher ambition leaders featured in their study "have been converging on a distinctive way to lead and manage" that delivers "better and more sustainable results in both economic and social terms."(See box: The practices of higher-ambition leaders Forging strategic identity Strategy development as a fundamental rethinking of the firm's strategic identity, that connects the firm's strategy with the sensibilities and passions of its people, and a perspective that views organizational capability as strategy Building a community of shared purpose Crafting a performance management process around a shared commitment to deliver dramatically higher value to customers, communities and employees as well as shareholders, where business (building economic capital) and organizational (building social capital) objectives are closely linked and diversity is embraced as a true source of potential competitive advantage Leading with "Sisu" (a Finnish word meaning "Gutsy'') Where achieving a higher ambition requires leading in a way that seeks to engage widely, provide the organization with clear strategic focus and a determination to stay the course, and devote huge personal energy into developing future leaders, building and aligning collective leadership at multiple lovels. (Adapted from Higher Ambition Leadership by Michael Beer, Russell Eisenstat, Nathaniel Foole, Tobias Fredberg and Flemming Norrgren (Harvard Business Review Press, 2011) and from "The higher ambition leader" by Nathaniel Foote, Russell Eisenstat and Tobias Fredberg, Harvard Business Review, September, 2011, pp. 95-102.) These CEOs seem to be exemplars of a more authentic form of leadership, more strongly rooted in the real market, with the vision, ambition and commitment to bring the resources and skills of business to addressing some of society's most pressing and challenging problems and creating shared value in the process. It's the kind of leadership that Martin, Porter and Kramer also should find heartening. This "Masterclass" guides executives through three complementary sets of insights into what is fundamentally wrong with the current model of capitalism, and the specific actions that they can take to create long-term economic and social value. In the book Fixing the Game, Roger Martin tracks the evolution of "shareholder capitalism" during the latter part of the 20th century and explains why it has become so detrimental: CEOs are expected to deliver results in both the "real market" (customers, factories, and products or services) and the "expectations market" (stock exchanges, shareholders and institutional investors). The real market "produces a positive-sum game for society." where all stakeholders can be better off was more and more value is created for customers." In contrast, the expectations market is a "gigantic zero-sum game," where wealth is redistributed rather than created. The order of priority does matter. A good alignment between shareholder interests and the priorities of management is possible if the primary performance metric is OTSR (Operating Total Shareholder Returns). This is a "value-creation" measure mainly driven by sales growth, margin improvement and asset efficiency, all of which are "real market" variables under the control of management. In their manifesto "Creating Shared Value" in Harvard Business Review, noted strategists Michael Porter and Mark Kramer show business leaders how to restore credibility to capitalism by adopting a view of corporate social responsibility: Mismanagement of a company's social responsibility in the "shareholder value" era has lead to the broad perception that companies prosper at the expense of the broader community. (Example: BP's oil spill in the Gulf of Mexico.) In contrast, the relationship between business and society can be a 'win-win' opportunity