We might never ask ourselves what companies and organizations are good for. But amidst the rising critique of capitalism and corporatism that undermines companies’ social contracts, they are in search of a new narrative and purpose to answer this question. The traditions of the Rhine model of capitalism could provide inspiration for our times.
Since the 1970s, the dominant raison d’être of companies (especially in the U.S.) was to increase their value to its shareholders. This is called the “Friedman doctrine”, after neoliberal thinker Milton Friedman in his famous 1970 essay “The Social Responsibility of Business is to Increase its Profits”. Therefore, the recent turn of America’s Business Roundtable, now advocating a broader, societal purpose of its members’ companies, implies a significant shift in the attitudes and ideas of big business in corporate boardrooms.
In part, this is a pragmatic and strategic move. The statement could be seen as an attempt to pre-empt an attack from politics, as Democrats are increasingly voicing anti-corporate sentiment in the face of rising corporate power and profits. For example, Elizabeth Warren made breaking up big tech her core issue, while Bernie Sanders wants regulation of corporate financial behavior tied to social objectives (e.g. raising worker pay). If Democrats win the 2020 presidential elections, combined with a majority in the House of Representatives, this will give them significant regulatory firepower. Furthermore, given the deteriorating public image of big business, they need to position themselves in order to attract future talent, which is why companies increasingly want their employees to take a stand on social, political and economic issues. Lastly, such a stance can attract a new source of finance. We have written before that younger generations prefer to invest and donate to organizations with a strong sustainable and ethically responsible stance, further empowered by digital technologies that can track their investments. Similarly, large institutional investors are demanding that the companies in their portfolios take more social responsibility (e.g. BlackRock) and help to address climate change (e.g. State Street). As such, business ethics is no longer an oxymoron, and could even become a source of comparative advantage for companies.
However, the move also marks a more fundamental turn in the philosophy of management and organizations. In his book Birth of Biopolitics, Michel Foucault distinguishes between two major forms of liberal policy: the German “ordoliberalism” of the Freiburg School that emphasizes the need for state intervention to generate a well-functioning social market economy. He contrasted this with the Chicago and Austrian schools that fiercely criticize any government involvement in private affairs and hold that markets – when left to themselves – produce the best socio-economic outcomes (i.e. laissez faire economics). This was inspired by the libertarian and individualistic cultures of the U.K. and U.S. Michel Albert built on this distinction and showed that there are in fact different types of capitalism: the Anglo-American model in the Anglophone world, and the Rhine model on the European continent, with the latter outperforming on most socio-economic indicators. This debate continued in the work of Hall and Soskice, who distinguished between two varieties in organizing capitalist societies: liberal-market economies and coordinated market economies (e.g. in Japan, Germany, the Nordics, Switzerland).
So the coordinated, social market “Rhine” economies, mostly found in continental Europe, can thus be distinguished from the laissez faire economics found mostly in the Anglophone world. A few core distinctions with respect to their ideas of a company stand out. First, the Rhine model of capitalism focuses on all stakeholders of the organization, and on the social and environmental embeddedness of the company, whereas the Anglo-American model focuses solely on shareholder value. Furthermore, organizations in the Rhine model focus on long-term relationships (e.g. enduring employment of managers, contracts with suppliers) and innovation to ensure survival, while Anglo-American organizations focus on short-term profits (related to their focus on shareholder value), and understand society primarily in terms of market competition. In contrast, the Rhine model focuses on societal consensus and collaboration between various social, public and economic organizations to realize objectives that transcend individual agents. The Dutch poldermodel (or “Rhine delta model”) is a good example of this. Lastly, the Rhine model assigns an active role to the state, which should help to establish conditions under which the market won’t derail and the behavior of individual companies will not result in bad macro-social outcomes.
These qualities of the Rhine model are becoming increasingly important, as the social contract of business organizations is under pressure because of rising socio-economic inequality and climate change. We have argued before that if we want to tackle these dual grand challenges of our times, we need a radical overhaul of the meta-rules of our socio-technical systems; that we are in need of a Second Deep Transition of the way we run our economies and society. One such directionality should be for companies to take more responsibility for and be more aware of their social embeddedness and their environmental impacts.
This also provides an opportunity for Europe to strategically position itself in the sensor-based economy. Recently, we wrote that a European Stack is taking shape, with a focus on setting the ethical standards for the implementation and social adoption of next-gen technologies. Europe’s socio-democratic and collaborative capitalism could strengthen its position as a regulatory and normative tech superpower, in between the libertarian capitalism of Silicon Valley and China’s techno-authoritarianism. Furthermore, given the rich and strong civil society in European countries, they could prove fertile soil for the emerging decentralized Stack, in which innovation is open-sourced; companies, public and social parties collaborate to tackle large social and environmental problems. Lastly, by operating on the basis of trust and reciprocity, values such as privacy and autonomy, as well as ethical codes of conduct could be strengthened by data ownership for citizens that are organized around specific co-operatives.