This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Freshfields Sustainability

| 7 minutes read

Business as unusual – Will COVID-19 herald the end of capitalism as we know it?

“The traditional drivers of value have been shaken, new ones will gain prominence, and there’s a possibility that the gulf between what markets value and what people value will close."

Mark Carney, The Economist, April 16, 2020

Back in the good old days – also known as 2019 – a very strange phenomenon was taking place. Capitalism became ‘cuddly’ as the FT put it. One after the other, bastions of global capitalism were calling for capitalism itself to be reformed in order to maintain its legitimacy and protect the future of wealth creation. Move forward a few months and it is clear that capitalism is indeed at a crossroads, far more so than anyone could have predicted. In this blog I will explore how this will impact our economies ‘postcorona’ and how the business community can best prepare itself.

Why question capitalism in the first place?

Even before our current crisis, there was a strong sense that modern-day capitalism had lost its way. The FT called for a ‘reset of capitalism’ in order to protect the future of free enterprise and wealth creation suggesting business leaders should pursue profit with purpose, while Larry Fink said we were on the edge of a fundamental reshaping of financearguing that a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.

Even the US Business Roundtable, one of the bastions of capitalism released a new Statement on the Purpose of a Corporation committing to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. This statement, a move away from the primacy of shareholder value, was signed by 181 CEOs of some of the world’s largest corporations.

These statements are mirrored in the wider debate about the purpose of the economy. For decades, there was an implicit assumption that the fundamental purpose of the economy is to deliver growth, measured as increases in gross domestic product (GDP). As long as the economy keeps growing, all will be well. This certainly held true as our economies were developing, and GDP growth remains a key driver in developing nations, where the link between economic growth and poverty alleviation is very strong, under the right conditions.

Yet our focus on economic growth as the driver of societal wellbeing does not give us a complete picture. For starters, many of the ills of society (wars, fighting crime, obesity, addiction, …) directly or indirectly contribute to GDP. Dutch academic Rutger Bregman summarises this neatly in his bestselling book ‘Utopia for Realists’: “If you were GDP, your ideal citizen would be a compulsive gambler with cancer who’s going through a drawn-out divorce that he copes with by popping fistfuls of Prozac and going berserk on Black Friday”. Similar contradictions also appear when looking at the way the environment is treated, as Mark Carney highlighted in a recent Economist article: The Amazon region appears on no ledger until it is stripped of its foliage, and converted to farmland.

Conversely, GDP also ignores many things we value in a healthy society. This was beautifully summed up by Bobby Kennedy in a campaign speech in 1968:

“The gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”

Postcorona, post GDP? 

The COVID-19 crisis has shown that human safety trumps the economy. We have made the decision to save lives in spite of the economic cost. It has highlighted that the fundamental purpose of governments is to protect their citizens. Even the world’s most liberal economies have not hesitated to intervene in the strongest manner possible to ensure our societies continue to function.

This begs a fundamental question, and one that could reshape our economies for decades to come: How do we define a successful economy and what is the role of governments, businesses and financial institutions in achieving such an economy?   

The call for responsible capitalism has only been strengthened by the COVID crisis. How business reacts to the crisis is under scrutiny. In a recent editorial, the FT argues that business must play its part as a corporate citizen if it wants to maintain its licence to operate, both during and after the crisis. The FT’s Moral Money newsletter publishes a weekly list of ‘Saints and Sinners’ highlighting which companies are leading by example and which are seeking to profit from others' misfortunes, while Paul Polman takes aim at the financial services industry, arguing it has not done enough to carry its share of the burden.

The FT concludes that ‘one of the consequences of the pandemic must be a redrawing of the relationship between business and society. The huge sums of money being committed by the UK government and others to support companies will inevitably lead to a larger role for the state.’ The Social Market Foundation in a new report underlies that this support will require reciprocity by business and should lead to a “new social contract” between British business, government and society. A redefining of capitalism as it were.

What will the ‘postcorona’ capitalism look like?

Stakeholder capitalism, inclusive capitalism, responsible capitalism, there are multiple terms for effectively the same thing, an evolution of capitalism that takes greater account of its impact on society and the environment and plays a prominent role in helping shape a more successful and sustainable economy.

I have highlighted some of the failings of GDP, but let’s not throw the baby out with the bathwater. GDP remains a valid measure of societal success, but it is only part of the story. To truly measure the success of our economy we need a broader set of indicators. Economists and social scientists have given this much though over the past two decades developing indices such as the UN’s Human Development Index, OECD’s Better Life Index and the Genuine Progress Indicator.

These all have their strengths (and weaknesses) but are probably not as relevant for the readers of this blog as they don’t focus on the role of business. The UN’s 17 Sustainable Development Goals (SDG) deserve a special mention as they effectively define what a sustainable world could look like and provide 169 indicators. They have also been embraced by many companies who are defining their strategies and reporting in accordance with the SDGs. (For a detailed analysis of the potential impacts of COVID-19 on the SDGs see the UN report  Shared Responsibility, Global Solidarity.)

Some fascinating thinking is also coming out of academia. For instance, the UK’s Centre for the Understanding of Sustainable Prosperity (CUSP) led by Professor Tim Jackson seeks to answer the question ‘What can prosperity possibly mean in a world of environmental, social and economic limits?’.  

But the framework that stands out in its explicit aim to reshape capitalism by both defining success and identifying clear actions to help us get there is ‘Rewiring the Economy’ developed by the University of Cambridge’s Institute for Sustainability Leadership (CISL) - Full disclosure: I am a fellow of the Institute. In this research programme, CISL identifies six ambitions of a successful economy:

Socio-economic ambitions

  • Meeting basic needs: Food, water, energy, shelter, sanitation, communications, transport, credit and health.
  • Wellbeing: Enhanced health, education, justice and equality of opportunity.
  • Decent work: Secure, socially inclusive jobs and working conditions.

Environmental ambitions

  • Resource security: Preserve stocks of natural resources through efficient and circular use.
  • Healthy ecosystems: Maintain ecologically sound landscapes and seas for nature and people.
  • Climate stability: Limit GHG levels to stabilise global temperature rise to well below 2ºC.

So far, so straightforward. Many before have developed a utopian ideal of what the world could/should/ought to look like. The real challenge is less in defining the vision, but in developing the pathway to get us there. And this is one of the strengths of Rewiring the Economy as it identifies ten interconnected tasks for governments, business and finance to focus on to achieve a rewired economy.

The above offer a very useful guidance for some of the core components of the new social contract between government, business and society and provides some practical steps that companies can implement as they develop pathways through the COVID-19 crisis and beyond.

Oh, and it’s good for business too

While you might assume that there is a moral case for a more responsible form of capitalism, the reality is that the business case is pretty strong too. A recent Fortune article reports on a growing trend from investors to better understand how their CEOs are responding to the crisis, driven by the realisation that ‘responsible businesses—those which look after all their stakeholders, not just their shareholders, and which strive to serve a purpose bigger than profits—may be better placed already to weather the immediate health crisis and economic downturn ahead’. The authors identify four reasons why this is the case:

  • Sound finances: Companies that embrace stakeholder capitalism as less likely to over-leverage their balance sheets than those that still follow the shareholder primacy model.
  • Employee loyalty: Companies that invest in their employees - in good and bad times - build trust that will generate a more loyal and engaged workforce.
  • Security of supply: Companies that treat their suppliers like partners will experience less disruption.
  • Consumer loyalty: Brands that show leadership are likely to be rewarded once the economy picks up again, while those that don’t are already being punished according to a recent Edelman Trust survey.

This good behaviour is already paying off as ESG funds have outperformed the market since the crisis began.

It seems fitting to close with a quote from Milton Friedman, one of the architects of the 'not-so-cuddly' version of capitalism from his 1962 book ‘Capitalism and Freedom’:

Only a crisis, whether actual or perceived, produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.

It appears some pretty interesting ideas are lying around.


sustainability, stakeholder capitalism, climate change, covid-19, covid19, responsible capitalism, responsible business