'Revolution in the Worldview of Business' – Qin Shuo Interview
A Question from the Queen of England
Shanghai Advanced Institute of Finance. Classroom of the Business Administration Doctoral Program. A chief executive with investments in the dairy industry says, "The key to whether an industry will develop well is having a leader who takes responsibility. In the dairy industry, for example, the giants spend billions on advertising every year but they are unwilling to spend anything at all on the dairy farmers. I always think that the negotiating capability of these dispersed individuals is weak and they are easily bullied. If this continues long-term, however, something is bound to go wrong."
Just as he finished speaking, an entrepreneur in the manufacture of machine parts continued. Every year in Quarter 4, engineering machinery businesses tender for the following year. They call the suppliers in and they all sit in a small conference room, one form and one pen each, to fill out their supply price, with the lowest winning. Should they protect the business or profits? Each supplier struggles inordinately with this problem. Following the cull of the price war, it feels as if a layer of skin has been peeled off them.
By squeezing suppliers, their days get worse while you yourself make more money. Is this a reasonable rule? The business world is fraught with such problems.
However, the rule behind the issues has never been truly challenged. Be it dairy businesses or machine engineering companies, their logic is "maximisation of shareholder profit" and legitimate business which is consensual, is there anything wrong with that?
Not only do entrepreneurs support this logic, thinkers do too. One of the most influential thinkers is Harvard University's Professor Theodore Levitt. He suggested in the Harvard Business Review in 1958 that the responsibility of a company was the pursuit of profit while the responsibility of government was to resolve social problems. If companies were made to solve social problems, they would have to be given more power. Companies would then gradually evolve into the economic, political and social center of power, which would be extremely dangerous. Another influential thinker is economist Milton Friedman who published his "The Social Responsibility of Business is to Increase its Profits" in the New York Times Magazine on September 13, 1970. He has always been of the view that a company is private property in the ownership of its shareholders and only needs to earn a profit for its shareholders. Because the larger the profits are, the greater the efficiency with which the company uses social resources and, therefore, the greater the contribution to society.
The financial crisis of 2008 was a great challenge to the above concept. Let's take the Royal Bank of Scotland (RBS) as an example. When capital was expanding freely to the maximum, people had no share in it, but when the crisis erupted and it was on the brink of insolvency, it needed a state bail-out. The bankruptcy of RBS meant that UK taxpayers, who had nothing to do with the shareholders, had to spend 45.5 billion pounds (almost 60 billion US dollars) alone on an equity injection!
In November 2008, during a visit by Britain's Queen Elizabeth II to the London School of Economics and Political Science, she threw out a question: "Why had nobody noticed that the credit crunch was on its way?"
In July 2009, 33 British economists send a joint letter of apology to the Queen. Following soul-searching, each of them appeared to be doing their own job properly on its own merit. The failure lay in each carrying out their own job, and not seeing the wood for the trees, and the extent to which this contributed to collective correctness. They said that the British Academy would provide some ideas to explore how government ministries, the Bank of England and government employees in other financial services regulators might "develop a new, shared horizon-scanning capability so that you never need to ask your question again".
In December 2012, the Queen visited the Bank of England, where she again asked what mistakes had led to the financial crisis? Had "complacency" been a factor. She also said, "I know that it is difficult to forecast development of the financial markets, but had employees in our central bank became a bit too lax?"
I like a phrase of economist Joseph Schumpeter, "The capitalist achievement does not typically consist in providing more silk stocking for queens but in bringing them within the reach of factory girls." As for the issues which go along with economic development, from the Queen of England to China's dairy farmers, everyone is uncomfortable and looking for answers.
Einstein said that the major problems which face us cannot be solved with the methods which created these problems. To eradicate the dysfunction within financial capitalism, a new business worldview is needed.
The Question Raised by Mars
In 2006, John Mars, Chairman of Mars, one of the world's largest food manufacturers and a non-listed company with more than 100 years of history, asked, "For a company engaged in business activity, what is the right level of profit?"
For the business world accustomed to "the responsibility of business is to increase profits", this was a truly ground-breaking question.
Perhaps by coincidence, Bruno Roche, member of the World Economic Forum and with a background in academia, was appointed Mars' Chief Economist in 2006. His major task was to answer this question. He led members of Mars' think tank to visit famous seats of learning across the world to engage in collaborative research while also launching laboratories within Mars itself. He finally found the answer in the Economics of Mutuality.
Unlike the conventional form of business centred around the business itself and shareholder value, the Economics of Mutuality advocates businesses to take into consideration the interests of each stakeholder with which it develops linkages, and find where the pain points in the whole ecosystem lay so that they can be addressed.
Mankind: Social and Human Capital
Earth: Natural Capital
Profit: Public Finance Capital
At the core of this is, from the ecological perspective, whether a business is ultimately creating value of destroying value.
To measure this, Roche has developed a set of standards and tools which do not use the conventional language of accounting but set out, from the four perspectives of human capital, social capital, natural capital and financial capital, standards which can accurately reflecting the content and value of the capital, and separately calculate what the rate of return, and input and output efficiencies ares for each capital, to see if it is as efficient as it can be.
This is mutual profit, it is a measure of specifically how much value is created or destroyed by each from of capital. The mutual profit of a highly responsible business will be greater than its financial profit, while the mutual profit of an irresponsible business will be less than its financial profit.
With these methods, business managers can understand exactly how much capital is being used in each category of capital, how much capital has been destroyed, and how much has been created in order to better find the equilibrium point. For example, a business should set aside a certain proportion of its profits to share with its stakeholders, but if the proportion of consumption is too high this will be adverse to growth.
I have studied corporate culture, and corporate social responsibility for many years. However, my conversation with Roche has opened new doors for me. Roche recalled,
"As a Jewish kid, I would come home from school, and the question my father would often ask me was not 'What did you answer right today?' but 'What questions did you ask your teacher today?'“
Asking the right questions is more important than answering the questions right. Today, what is the correct profit level? What kind of profit is appropriate? These are the 'right questions' of significance. They also lead to two additional questions. First, Is there an optimal level of profit which can ensure the overall value created by a business is optimised, including sustainable, healthy and profitable development. Second, what moral principles can prove that a business can derive the largest value from the business ecosystem it relies on for its operations and long-term development. These two questions, which respectively concern maximisation of overall value and ethical standards, encourage us to think big about how business can become a force for healing and restoring social and environmental problems.
If we return to the example at the beginning of the dairy business, the two corresponding questions are: first, compared to the must sustained and optimum profits gained through the whole life cycle of the business, is the method of optimising current profits appropriate? Second, what kind of principles should be established to better assess the value a business should achieve from its whole ecosystem?
What Does the Economics of Mutuality Mean for Businesses?
When many businesses hear of the Economics of Mutuality, they may think what does that have to do with me? It is, in fact, very meaningful.
First, it fundamentally changes the understanding of business and re-establishes a sense of mission.
Roche says, "The goal of the vast majority of businesses is to make money. But if they just make money then it is left alone to fight a lone battle. For example, building a car: why build the car? Many will answer that one can make more money from building a car. The answer of the Economics of Mutuality, however, is that building a car can give mankind mobility and it is good for the community. Specifically which car it is, is just a solution to mobility. This is a broader and bigger vision from which you must consider other factors of non-car businesses within the ecosystem such as the city, government, bikes, pedestrians and so on. If you build a car for the sake of it, you will exclude yourself from mobility and forget the fundamental purpose of human travel services.”
"The drawback of the traditional business model is that the business is self-centred, just like the ‘geocentric theory' which believes that the Earth is the centre of the world. In fact, the Earth is just a planet in the solar system. The Economics of Mutuality is 'decentralised' because this is closer to the truth of business. When a business does not take itself as the centre, it will see itself more clearly and its relationships with other people will be more durable so that its business performance will be better."
Second, it fundamentally changes the understanding of business and achieves "generating value from value".
Traditionally, the commercial unit of measurement has been currency and numbers, financial capital. Money is the lingua franca of business and it is as if anything can be converted into money, and can be solved with money.
The Economics of Mutuality believes that economic development needs three basic inputs: the Earth which provides resources; people who change resource patterns and add value: and finance capitalism which provides economic activity with capital flow. Each input has its unique value, each of which can obtain its due remuneration. The current drawback is that while stressing the remuneration of a given input, the other inputs are often sacrificed. For example, some emphasise the remuneration of people at the expense of sacrificing profit and the health of the planet. Financial capital sacrifices people and the Earth to reward the owners of finance capital. Environmentalists sacrifice financial capital and people to compensate the Earth. Each of these has its limitations. To build a truly sustainable business, we must optimise overall the value of all three inputs.
Roche has established standards for measuring each type of capital, including some variables which are simple but have a strong explanatory power, and can be used to explain more than 75% of capital impact. Human capital, for example, has five variables: consistency with corporate image (words and deeds are consistent with the values espoused), and the social capital of employees, the effect of prospects for upward mobility, status, and the impact of one's direct leaders. The three variables of social capital are: trust, social cohesion and capacity for collective action. The five variables of natural capital are: materials (renewable and non-renewable), and air, water and soil erosion. Finally, the measures are how to allocate (share) among stakeholders in the established value chain.
The significance of this innovative method is that one sows what one reaps, and different methods are used for different situations. To solve the problem of human capital, one must use input and adjustment of the corresponding variables rather than solving with financial capital. For example, a project Roche started with Mars China found that the biggest pain point for Chinese people is the level of human capital and the problem of happiness in one's work. These needs to be improved in line with the five variables of human capital, for example, by letting people know the clear prospects of moving up when designing career paths.
Money cannot solve all problems. The solution to a problem relies on "driving value with value, generating value from value".
Third, fundamentally changing the law of the jungle in which the strong prey on the weak so that the weakest link commercial value chain does not become weaker but in fact becomes strengthened so that the entire economy becomes healthier and more sustainable.
The logic of conventional business is that the winner takes it all, the law of the jungle and the Matthew Effect. In the Economics of Mutuality, however, business is repositioned as a restorative healing power. It has discovered that finance capitalism has a destructive and almost unreasonable attitude which extracts maximisation of short-term profits for shareholders rather than re-investing in stakeholders in the value chain. This leads to the ever clearer cracks in the entire system. The Economics of Mutuality hopes to bring some hope to the weakest places along the value chain.
Maua: A Case Study in the Economics of Mutuality
In 2013, Roche's team launched a commercial project of a pilot in micro-entrepreneurship and micro-distribution among the poor in Kenya. This project was called "Maua". The business objective of the project was to develop new, profitable, "last mile" deep distribution routes in specific urban slums and rural areas in Kenya, places where the Mars-owned Wrigley chewing gum could not reach the market through traditional distribution channels.
Wrigley has one chewing gum plant in Kenya, but it had never made urban slums and rural areas its target market. It sales were mainly concentrated in large retail stores such as supermarkets and small shops such as gas stations and pharmacies, all of which were operated by a general distributor.
In this long-neglected market at the bottom of the pyramid, Maua developed partnerships with some non-traditional citizen groups, used their understanding of informal social networks and create "trust" within the poor groups, and recruited and trained some willing entrepreneurs. From this, more direct micro-sales channels were developed. There was a central stock point (the "stockist") in the core micro-distribution network, micro-distributors would move the goods with their bicycles, and deliver them from the stock point to the small retailers or sell directly to self-traders ("street vendors"). During this process, Maua integrated entrepreneurial opportunity with micro-finance capital, and relatively generous human and social capital. It also provided technical and training support, and helped distributors and vendors use efficient e-payment methods such as mobile banking.
The hypothesis of Maua was that by focusing on the needs of others, the company would be able to successfully tap into a new group and thereby profit. Since the project launched in September 2013, when seven micro-entrepreneurs started operations within slum, Maua has successively developed in different region. Total sales have exceeded 7 million US dollars, an excellent profitability. Today, it has become an important part of the local Wrigley enterprise.
Roche says that as equally important as its financial accomplishments, Maua can measure the added value of human and social capital as they develop over time. "We hope that not only through the rational allocation of financial capital, but also through improvements in education, training and personal satisfaction measure the benefits for employees. Within the 18 months since Maua was launched, the team of micro-entrepreneurs has increased from the original seven to more than 450 in its second year, and quickly growing to more than 700 in its third year. In the non-financial capital forms, Maua has achieved and excellent measurable value level with human capital being raised to 80%, social capital being raised to 20% and shared financial capital (represented by growth in the finances of the micro-entrepreneurs) has been raised to 47%.
The Maua case demonstrates that in blank spots in the business ecosystem and in pain points on the value chain, suitable stakeholders can be found, trust can be built, social and human capital can be provided and financial capital efficiency shared to drive forward improvements in business performance.
More than 30 similar projects have been launched, and the new model of Economics of Mutuality has the potential to completely revolutionise traditional business. Roche said,
"It has the ability to make capitalism more complete, and by doing these, we can heal a world which is shattered on so many levels."
Practice has proved that helping the weak on the business value chain so that these specific stakeholders benefit also helps businesses to achieve the "maximum success". In Mars, be it the coffee business unit helping coffee bean growers at the very beginning of the value chain to increase social capital, or Wrigley chewing gum identifying potential opportunities for mint growers on the value chain, they are all conducting meaningful tests. For example, they have discovered that a bigger opportunity for chewing gum lies in improving the "level of shared prosperity" in the distribution network, particularly in emerging markets. In Kenya, they set about testing their ability to nurture micro-entrepreneurs. The first attempt failed but with the help of local partners, they slowly improved and soon made some very promising results. On seeing a young mother in Nairobi had increased her income from subsistence levels to a level where she could support her child's education, they said is no personal experience more stimulating then meeting our micro-entrepreneurs!
Helping to change the fate of those people for whom change was long overdue changes yourself and accomplishes you. The Economics of Mutuality is becoming an organic integration of humanism and market forces.
"Do Good, Do it Better, and on a Big Scale"
To varying degrees, the wave of economic popularism has appeared all over the world, in which a precipitating factor is the serious disparity between rich and poor. The traditional economic system seems to have the end of its cycle. Previously, the unique trust in money was supreme, and the ultimate goal was the endless accumulation of financial capital.
Roche believes that the imbalance of wealth is beyond doubt but the solution by Thomas Piketty is based on an unreliable assumption that global bodies or national governments can achieve a better redistribution. In fact, in the depths of our culture, history and human identity, there is a principle of fully taking care of each form of capital and seeking mutual benefit rather than a relationship of exploitation. We also do not need to create balance through redistribution but the management of financial capital should be put in the hands of those who are skilled in this and have a sense of responsibility as long as their purpose is developing overall prosperity for the benefit of the majority rather than the minority, and they do not benefit individuals at the expense of others.
Roche said that we may have a generation of people with only one chance, that is to re-position business and turn it into a restorative healing power for the global economy so that economic participants on multiple levels gain greater return. By healing business, we can heal the world. Doing good to society and the Earth can in fact be achieved through business practices, and not always at the expense of financial capital. A "win-win" situation on the business value chain is actually viable, and can bring the creation of excellent overall value. "He who does good will do well". In this way, business can bring about the social and environmental translation which government and charities are unable to achieve.
The world must restore sanity and put the greater interests ahead of our own to great an environment that places more importance on long term interests and breaks away from short-termism.
Roche has said that if business leaders are convinced that they have a new method to "do good, doing it better an on a bigger scale", businesses are more likely to move the world from the ideal into reality. Outstanding businesses in the future will not only earn more money for their shareholders, more will be how to use the power of their business to thoroughly and consciously consider social problems that they can solve. Outstanding businesses need to expand their balance sheets to cover the impact on social, human and natural capital of the stakeholders in their business ecosystem while driving profits and bringing greater mutual benefits for mankind and the Earth.
Does China Need to Rewrite the Business Rules?
At the end of my discussion with Roche, he said that the Economics of Mutuality is most suited to China. This is because in China's history there is a tradition of balancing rights and profit. He cited the example of WeChat in which mutual profit is far higher than its financial profit.
In the history of business in China, there has always been a debate between rights and profit. However, for quite a long time, profit has been overly looked down upon; this is the so called principle of "a gentleman is ashamed of mentioning profit". Confucius said, "The gentleman comprehends according to rights, the small man comprehends according to profit.". Xunzi said, "When rights win above profit, the world is at peace and prosperous. When profit wins above rights, the world is turbulent". This tradition of looking down on profit is not conducive to economic development. In recent decades, however, following torrents in the market economy which have led to surges in wealth, many people and businesses were trapped in a vortex of success and quick profits, by fair means or foul, from which they could not extricate themselves. These times need both a strengthened rule of law and a review of the part of traditional views of right and profits which are of value and have some warmth.
In today's business world in China, many businesses consider not mutual benefit but how to pocket all profits, not how to improve the capabilities of stakeholders at the weakest links of the value chain but how to set up barriers to exclude them. For example, the sales "moats" in some businesses actually only let dealers sell their own products and do now allow them to act as agents for competitors.
I think that when Maua was launched in the urban slums and rural parts of Kenya, to help the micro-entrepreneurs they were permitted to sell products from the competitors of Wrigley chewing gum so that the entrepreneurs' products could be diversified and make the business larger. Those businesses in China which force shops to chose one or the other should weight up this reciprocity, and draw lessons and learning from it.
In my opinion, the Economics of Mutuality is an effective medicine for China's business world since it is both constructive and innovative. Because it does not depart from market forces to engage in isolation in charity or social responsibility, but implements social responsibility in an innovative business model and operations, rights are within profits and both are delivered in common.
What is the correct profit level for a business? This remarkable question has opened up remarkable explorations into new business values.
Global business has taken a key step for rewriting business and systemic transformation.
In China, meanwhile, what is it that creates value for business? What is it that really gives business value? We have the opportunity to make a better exploration.
This article only represents the personal view of the author. Friend Qin Shuo's WeChat Moments, ID: qspyq2015. This is the 2375th original article to be published first on Qin Shuo's WeChat Moments.