Toward Moral Capitalism<br />Reconciling private interest with the public good<br />Caux<br />Round <br />Table<br />John ...
	The Caux Round Table (CRT) is an international network of principled business leaders working to promote a moral capitali...
Co-founding board member of the Sustainable Business Network of Washington (SB NOW); a partner organization with CRT<br />...
Background<br />History and theory <br />Global financial crisis<br />What happened<br />What can/should we learn from it<...
Capitalism is an economic, not a political model<br />Culture (nationality, faith, etc.) define how capitalism is implemen...
15th/16th Century	Venetian accounting system and argosy 			voyages - entrepreneurs began to 				combine capital and labor ...
1880 – 1980 		Non-communist response:<br />				welfare state capitalism<br />Bismarck’s reforms<br />					Free trade union...
Adam Smith <br />Observed economic reality - people act in their own interest. <br /><ul><li>Self-interest not always good...
"By pursuing his own self interest he frequently promotes that of society more effectually than when he really intends to ...
Does that (still) hold true in 2010?<br />
Cash for Clunkers - Results<br />
Sub-prime mortgage loans made, increasingly against future resale value of the home, not against real income<br />Mortgage...
1620		Tulip mania<br />1711/1720	South Sea Company London<br />1719/1720	Mississippi company France<br />1929		Wall Street...
Current crisis is global<br />AIG<br />Fortis<br />Iceland<br />EU guarantees bank deposits<br />UK takes over two banks<b...
World economic order has inadequate mechanisms to prevent financial crises<br />World Trade Organization<br />Internationa...
Principles       Outcomes<br />Principles Congruent with Self-Interest<br />Premises of Moral Capitalism<br />Principles D...
Whenever a system produces a consistent result, the inevitable conclusion is that that system was designed to produce that...
When financial markets implode, markets lose liquidity, exchanges of goods and services fall, output is reduced, employmen...
When the distance between the haves and have-nots is perceived as insurmountable; the status quo is threatened …<br />
How do you determine ‘real’ value of assets? It is the INTANGIBLES that define value<br />Bear Stearns (2008)<br />March 1...
Most simple calculation:<br />What is a company worth?How do we measure its value?<br />Discounted net present value of fu...
You cannot establish value without putting risk into the calculation<br />What is the risk of not achieving predicted futu...
Management of risk enhances enterprise value<br /><ul><li>Risk management leads to more certain income
Risk reduction leads to higher valuation</li></ul>Second Fundamental Conclusion<br />
Stakeholder relationships entail risk<br />   - customers<br />   - investors<br />   - government regulators<br />   - em...
The Good<br />The Bad<br />The Ugly<br />How do companies create value?<br />
Risk Assessment/continuous Risk Reduction<br />Optimize Stakeholder Benefits <br />Moral Capitalism<br />The Good<br />
Feed Shareholders, Abuse Stakeholders<br />Commodity pricing/ compete on pricing/low costs<br />Rent seeking (market power...
No net wealth creation; speculation in trading  <br />(Rob Peter to pay Paul)<br />Irrational Exuberance<br />(Market trad...
Intangible Assets = CSR Stakeholder Relationships<br />Customers<br />Employees<br />Owners/Investors<br />Suppliers<br />...
Financial Capital<br />Physical Assets<br />Intellectual property<br />Sustainability<br />Brand loyalty<br />Quality of e...
To improve company valuation,Improve CSR relationships!<br />Good CSR Relationships Lead to The Sustainable Corporation<br...
Far beyond the goods and services your company provides<br />The IMPACTS* those goods and services and the manner in which...
Needed for quality income<br />Necessary to get low cost of capital <br />Critical to hire/retain the best employees<br />...
<ul><li>Undermining Stakeholders Puts Capital Accounts at Risk</li></ul>Taking Due Care of Stakeholders Enhances Capital A...
The power of reputational capitalFor whom would you rather work?For whom would you rather tell people you work?<br />
The Theory of the Moral Firm<br />(self interest considered upon the whole)<br />Financial<br />Capital<br />Reputational<...
The Corporate Improvement Cycle<br />
 Board of directors<br /> CEO <br /> Senior management<br /> Division heads and group managers<br /> Unit managers<br /> E...
An example<br />Caux Round Table Japan<br />
Vision not yet fully embedded across the company.<br />No integrated local community development program across different ...
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Toward Moral Capitalism

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Toward Moral Capitalism

  1. 1. Toward Moral Capitalism<br />Reconciling private interest with the public good<br />Caux<br />Round <br />Table<br />John Friedman – Sustainable Business Network of Washington<br />BUSINESS LAW 5175 -- Business, Law &Ethics in Modern Society<br />
  2. 2. The Caux Round Table (CRT) is an international network of principled business leaders working to promote a moral capitalism. <br /> The CRT advocates implementation of the CRT Principles for Business through which principled capitalism can flourish and sustainable and socially responsible prosperity can become the foundation for a fair, free, and transparent global society.<br />The Caux Round Table<br />Steve Young<br />www.cauxroundtable.org<br />twitter: @CauxRoundTable<br />
  3. 3. Co-founding board member of the Sustainable Business Network of Washington (SB NOW); a partner organization with CRT<br /> 20 years+ career including corporate communications/organizational development, public/community relations, sustainability and CSR<br />About Myself<br />www.sbnow.org<br />twitter: @SustBusNOW<br /> @JohnFriedman<br />
  4. 4. Background<br />History and theory <br />Global financial crisis<br />What happened<br />What can/should we learn from it<br />Moral Capitalism <br />Determining ‘true’ value<br />The Caux Round Table principles in action<br />Overview<br />
  5. 5. Capitalism is an economic, not a political model<br />Culture (nationality, faith, etc.) define how capitalism is implemented<br />Individual wealth creation – the ability to earn and retain capital – is a tremendous force for change<br />Short-term thinking is inconsistent with long-term best interests<br />At the outset …<br />
  6. 6. 15th/16th Century Venetian accounting system and argosy voyages - entrepreneurs began to combine capital and labor in discrete projects. Evolved into going concerns called corporations<br />1600 – 1750 Capitalism grows prosperous in Holland, England and Scotland<br />1776 An Inquiry into the Nature and Causes of the Wealth of Nations <br /> - Adam Smith<br />1830 – 1870 Abuses of capitalism (mills of Manchester; Ebenezer Scrooge)<br /> Communist Manifesto – Marx, Engels<br /> Das Kapital- Karl Marx<br />A Brief History of Capitalism<br />
  7. 7. 1880 – 1980 Non-communist response:<br /> welfare state capitalism<br />Bismarck’s reforms<br /> Free trade unions<br /> John Maynard Keynes / New Deal<br /> Japan, Inc.<br /> Austrian school of economics<br />1989 – 2004 Collapse of communism<br /> Rise of CSR<br /> CRT Principles for Business (1994)<br />United Nation’s Global Compact (2000)<br />Moral Capitalism - Stephen B. Young<br />A Brief History of Capitalism<br />
  8. 8. Adam Smith <br />Observed economic reality - people act in their own interest. <br /><ul><li>Self-interest not always good but alternative is worse:
  9. 9. "By pursuing his own self interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” (p. 456).</li></ul>In free/open markets, how does a nation keep its capitalists from moving their capital out of the nation and into other countries where labor could be bought more cheaply? <br /><ul><li>“(By) preferring the support of domestic to that of foreign industry," the capitalist will in a sense be "led by an invisible hand to promote an end which was no part of his intention."</li></ul>On the Wealth of Nations<br />
  10. 10. Does that (still) hold true in 2010?<br />
  11. 11. Cash for Clunkers - Results<br />
  12. 12. Sub-prime mortgage loans made, increasingly against future resale value of the home, not against real income<br />Mortgage loans packaged and sold to global capital markets<br />Collateralized debt obligation (CDOs) issued to finance purchases of packages of sub-prime mortgages and to invest in hedge funds<br />Credit default swaps invented to give added value to CDOs<br />Debt upon debt upon debt<br />Low interest rate environment<br />Incentive structure driven by fees, not investment in long-term returns<br />So what happened?<br />
  13. 13. 1620 Tulip mania<br />1711/1720 South Sea Company London<br />1719/1720 Mississippi company France<br />1929 Wall Street<br />1980s Junk bonds<br />1990s Dot.coms/telecom<br />Today Sub-prime mortgages/CDOs<br />Financial meltdowns are a systemic dysfunction of capitalism<br />Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one. – Charles MacKay<br />Irrational exuberance – Alan Greenspan<br />
  14. 14. Current crisis is global<br />AIG<br />Fortis<br />Iceland<br />EU guarantees bank deposits<br />UK takes over two banks<br />Equity markets in Asia tank<br />Price of oil drops by 50%<br />Real economies lose employment and consumer demand<br />Why is this time different? Is it?<br />
  15. 15. World economic order has inadequate mechanisms to prevent financial crises<br />World Trade Organization<br />International Monetary Fund<br />World Bank<br />G20<br />Bank for International Settlements<br />Etc.<br />
  16. 16. Principles Outcomes<br />Principles Congruent with Self-Interest<br />Premises of Moral Capitalism<br />Principles Drive Real Outcomes<br />
  17. 17. Whenever a system produces a consistent result, the inevitable conclusion is that that system was designed to produce that result, regardless of whether or not the outcome matches the intended outcome.<br />What are the principles that are driving outcomes?<br />When short term shareholder returns are elevated to a core value, corruption is inevitable. <br />– Noel Purcell, CRT Chair<br />
  18. 18. When financial markets implode, markets lose liquidity, exchanges of goods and services fall, output is reduced, employment is cut<br />Debt must be taken out of the financial system<br />Asset values have to be reset at lower levels<br />Asset owners lose wealth<br />What happens when bubbles burst?<br />
  19. 19. When the distance between the haves and have-nots is perceived as insurmountable; the status quo is threatened …<br />
  20. 20. How do you determine ‘real’ value of assets? It is the INTANGIBLES that define value<br />Bear Stearns (2008)<br />March 14 - $80/share book value <br />March 17 - $2/share<br />May 10 – sold at $10/share after shareholder outcry and assistance from Federal Reserve Bank<br />Lehman Brothers<br />Despite billions in assets, management liquidated the company as no buyers emerged with confidence in it as a going concern<br />
  21. 21. Most simple calculation:<br />What is a company worth?How do we measure its value?<br />Discounted net present value of future income<br />Capitalization multiplier<br />x<br />
  22. 22. You cannot establish value without putting risk into the calculation<br />What is the risk of not achieving predicted future revenue? <br />How certain are estimates of future income?<br />What are the risk factors that determine the capitalization multiplier? <br />A higher risk demands a lower multiplier<br />First Fundamental Conclusion<br /> Higher Increased Lower<br /> Risk Uncertainty present value<br />Note: Each source of risk drives business value up or down<br />
  23. 23. Management of risk enhances enterprise value<br /><ul><li>Risk management leads to more certain income
  24. 24. Risk reduction leads to higher valuation</li></ul>Second Fundamental Conclusion<br />
  25. 25. Stakeholder relationships entail risk<br /> - customers<br /> - investors<br /> - government regulators<br /> - employees<br />Each relationship is an intangible asset of the business (assets can appreciate or depreciate)<br />Lowering risk for each relationship enhances the quality of intangible assets and increases business valuation<br />Strategies for Managing Risk<br />
  26. 26. The Good<br />The Bad<br />The Ugly<br />How do companies create value?<br />
  27. 27. Risk Assessment/continuous Risk Reduction<br />Optimize Stakeholder Benefits <br />Moral Capitalism<br />The Good<br />
  28. 28. Feed Shareholders, Abuse Stakeholders<br />Commodity pricing/ compete on pricing/low costs<br />Rent seeking (market power)<br />Take the money and run: short-term thinking<br />Unsustainable Valuations =Eventual Failure<br />The Bad<br />
  29. 29. No net wealth creation; speculation in trading <br />(Rob Peter to pay Paul)<br />Irrational Exuberance<br />(Market traders/short termism)<br />False Valuations<br />(Enron: Ponzi Schemes; sub-prime mortgages, CDOs…)<br />Encourage unsustainable pricing <br /> (of securities CDOs, CDSs)<br />INEVITABLE FINANCIAL MELTDOWN<br />The Ugly<br />
  30. 30. Intangible Assets = CSR Stakeholder Relationships<br />Customers<br />Employees<br />Owners/Investors<br />Suppliers<br />Competition Strategies<br />Community Support<br />CSR and Valuation<br />
  31. 31. Financial Capital<br />Physical Assets<br />Intellectual property<br />Sustainability<br />Brand loyalty<br />Quality of employees<br />Community support<br />Labor environment<br />Unallocated goodwill<br />Tangible Values<br />(Generally Audited Financial Information)<br />Intangible Values<br />(Generally Non-audited, Non-financial Information)<br />
  32. 32. To improve company valuation,Improve CSR relationships!<br />Good CSR Relationships Lead to The Sustainable Corporation<br />Conclusion:<br />
  33. 33. Far beyond the goods and services your company provides<br />The IMPACTS* those goods and services and the manner in which they are produced have on peoples’ lives<br />What does your company do?<br />* Real and perceived<br />
  34. 34. Needed for quality income<br />Necessary to get low cost of capital <br />Critical to hire/retain the best employees<br />Gets you through rough times<br />Avoids commodity pricing/builds value added<br />Reputational Capital(brand equity; goodwill)<br />
  35. 35. <ul><li>Undermining Stakeholders Puts Capital Accounts at Risk</li></ul>Taking Due Care of Stakeholders Enhances Capital Accounts<br />
  36. 36. The power of reputational capitalFor whom would you rather work?For whom would you rather tell people you work?<br />
  37. 37. The Theory of the Moral Firm<br />(self interest considered upon the whole)<br />Financial<br />Capital<br />Reputational<br />Capital<br />$$$<br />Sustainable profits; maximum value<br />Physical<br />Capital<br />Conversion<br />Process<br />Output<br />(Goods/<br />Services)<br />Customers<br />INPUTS<br />Social<br />Capital<br />Human<br />Capital<br />RETURN ON CAPITAL<br />(preserve adequacy of capital inputs)<br />
  38. 38. The Corporate Improvement Cycle<br />
  39. 39. Board of directors<br /> CEO <br /> Senior management<br /> Division heads and group managers<br /> Unit managers<br /> Employees<br />Who participates?<br />
  40. 40. An example<br />Caux Round Table Japan<br />
  41. 41. Vision not yet fully embedded across the company.<br />No integrated local community development program across different countries.<br />Company internal communication is poor on the issue of environment.<br />Customers' trust is weak. <br />Communication with suppliers/partners is poor.<br />High level of compliance, risk management and internal audit have been achieved.<br />Caux Round Table Japan<br />
  42. 42. “It's not your blue blood, your pedigree or your college degree. It's what you do with your life that counts.”<br /> - Millard Fuller<br />Businessman/entrepeneur<br />attorney<br />self-made millionaire by age 29<br />founder/president of 8th largest homebuilder in America<br />
  43. 43. Thank you!<br />Questions? Comments? Thoughts?<br />

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