With capitalism under siege, where will it end?

BHP CEO Andrew Mackenzie stresses that profits and purpose are not an either/or proposition. Picture: Aaron Francis

Are the pillars of capitalism really cracking? On Wall Street on Friday, the Dow Jones fell another 2.4 per cent after another escalation in the US-China trade war and another blistering attack by Donald Trump on his central bank chairman that amounts to an accusation of treachery.

“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” Trump tweeted. Over in Wyoming at Jackson Hole, central bankers, including the Reserve Bank’s Philip Lowe, pondered the big hole many would accuse them all of digging for themselves: bond markets decoupled from traditional macro­economic settings, inverted yield curves, and the central bank entourage seemingly unfazed by the idea of negative rates spreading across the world.

G7 leaders meeting in Paris have few answers. Free trade and globalisation are under siege by populism on a scale that disturbs every big business leader. “We are anxious about a range of things happening around the world,” BHP chief executive Andrew Mackenzie acknowledges, “rejecting the power of globalisation, the power of large companies like ourselves, our involvement in global supply chains; just general rejections, whether it’s from the Right or the Left, of the principles of free enterprise, of free markets, of free trade, of free competition, without tariffs and without subsidies. We depend on the freedom and we depend on globalised capitalism, which we think allows the world to generate a lot more wealth and share it. There are many, many people who think that you can renounce or change the model of globalisation, and a lot of politics has now decided that through greater intervention into industry, interference in the work of the central banks, that you’ll get a better model.

“I think you’ll get a worse model.”

Qantas boss Alan Joyce is equally worried: “Anywhere we have put a free-trade agreement in place, we have had significant growth in trade between those countries and it has been to the benefit of our country. Definitely, this trade war is starting to have a significant impact in some areas. IATA, the industry body for aviation, has said that we have now had eight months of negative global cargo growth and in July it was down by 4.8 per cent.

“We know it can spread to the rest of the economy and we know it can have an impact on the world economy. That is not good for trade. That is not good for business.”

The problem for business, however, is that the finger of blame for all this is pointed squarely in its direction. This surge in populism breeds from anger over inequality, both real and perceived. The unacceptable face of capitalism, which began with corporate raider Tiny Rowland of Lonrho back in 1973 and was deliciously portrayed by Gordon Gekko in 1987, would appear to be spreading right across the top floor, evidenced by the exposure of greed that caused the global financial crisis in the US, and in Australia the recent royal commission. Big business is being forced to look itself in the mirror: fat cats, fat pigs, answering only to their one-eyed shareholders.

The primacy of shareholders over any other stakeholder in a company, ahead of say, employees or the environment, has been the creed for 50 years, thanks to economist Milton Friedman.

It is the investor that takes the risk, the investor that is the engine of corporate growth; ergo, the company must be responsible to shareholder first. But last week, big business in America announced it was throwing out Friedman and ‘‘shareholder first’’ and bringing in more acceptable capitalism.

The US Business Roundtable signed up 181 business CEOs and chairs, among them JPMorgan’s Jamie Dimon, Apple’s Tim Cook, Birdgewater co-chairman Ray Dalio and Lachlan Murdoch, the executive chairman of Fox Corp and co-chairman of News Corp, to commit to value for customers, fair compensation for employees, fostering diversity and inclusion, dealing fairly with suppliers and protecting the environment — as well as delivering long-term value for shareholders.

In Australia, both Alan Joyce and Andrew Mackenzie have been pioneering their own more inclusive capitalism, particularly on diversity and carbon emissions.

“I think it is really positive” Joyce says of the US Roundtable.

“We have always approached it from a Qantas perspective as having a number of stakeholders, and they are all equally important and you need to address them all. We have given amazing value back to our shareholders, we gave another bonus to our employees, we have invested $2 billion in new aircraft and product for our customers. We have capped airfares in regional communities that have suffered. We have raised $3 million for drought relief.”

“Of course, we could sign up to that,” says BHP’s Mackenzie of the Business Roundtable declaration. “But we have been talking that way I think for some time. That is why I talk about global warming and one or two other social issues that are very close to our operations.” Mackenzie stresses that profits and purpose are not an either/or proposition.

“We certainly believe in profits with a purpose. We have a purpose for BHP which is that we bring people and resources together to create a better world. That’s something we use in a very motivational way internally, but I’m happy to talk about it externally. My strong view is that the profit motive is incredibly powerful in getting you to do the right thing and when you put a purpose behind that, as a result of having a profit motive, you secure that purpose in a much more effective way. But that sense of purpose also means it drives higher levels of profitability.

That is the beauty if you like of capitalism, of free markets, of the role of globalisation and large companies like us to create more wealth with a purpose, but also create more wellbeing.”

Not everyone is convinced businesses will walk the walk after the US Business Roundtable talk. Former US Treasury secretary Larry Summers sees it as part of strategy to hold off tax and regulatory reform. Others like Democrats Bernie Sanders and Elizabeth Warren point to the salary packages of CEOs and the many share buybacks and dividend splashes offered to shareholders, which they say hollows out business investment. They want legislation to give explicit weight to other stakeholders: climate change and to workers and their wages.

Inevitably, last week’s declaration has kicked off a pre-picnic legal debate in the US on shareholder primacy and directors’ duties. In Australia, Kenneth Hayne argued that a director’s duty to act in the best interest of the company also means looking at much more than financial return and shareholders, because in the long term, interests of all stakeholders should come together. And interestingly, the Hayne view has been the one used by some boards under pressure from environment, social and governance activist investors: a move away from coal is in the long-term interest of the shareholder, because it is in the long-term interest of the planet and therefore the business.

Joyce proudly announced a 2 per cent efficiency reduction in CO2 emissions at the Qantas results last Thursday. “We are the largest carbon-offset program of any airline in the world by miles,” he notes. Yet Joyce is still being heckled by climate activists like Greta Thunberg. It begs the question, if shareholder primacy goes, where does a directors’ duty lie? Clearly, climate activists want more.

“They do and I think it is up to us to recognise that we need to be very careful here. We can’t throw the baby out with the bath water. There is bath water. We recognise that, we need to fix it. But think of the benefits in this current world of aviation, think of the benefits to trade, employment, and getting people to meet and getting people to communicate and getting people from different cultures to exchange. We can’t lose that. And that’s the baby. We have to be very, very protective of it, and make sure we fix the underlying issue and not lose all of those positives of aviation. And that’s up to me as CEO of one of the biggest airlines and all of the CEOs of the airlines to make that case.”