CAMBRIDGE – On whose behalf do business associations speak? Well, business. But who is “business”? It’s an increasingly urgent question, because while firms have radically changed how they think about themselves, business associations have yet to catch up. And the resulting lag is making capitalism less legitimate in many countries.
The traditional view of the firm – shared by both Karl Marx and Milton Friedman – is that it is an organization owned by capitalists (shareholders), on whose behalf it is run. It hires workers and buys other inputs to maximize returns for those who put up the money. According to Friedman, the social responsibility of the firm is to increase profits. Any goal that does not directly benefit shareholders is just another distortionary tax.
But what makes all of a firm’s stakeholders behave in a way that maximizes value? In fact, modern corporations struggle to create a sense of a collaborative community of employees, managers, suppliers, lenders, distributors, service providers, customers, and shareholders, all cooperating to create value by better satisfying customer needs and aspirations.
That’s why United Airlines would prefer that its employees treat passengers with grace. Or why Goldman Sachs wishes its bankers would not aid and abet massive corruption. Apple expects its suppliers to treat their workers humanely. UnitedHealthcare hopes its employees manage reimbursements honestly. Uber’s shareholders worry that misbehavior by senior executives may cause customers to switch service providers and valuable workers to quit.
To create functioning collaborative organizations, humans have evolved a sense of “us,” a feeling of belonging to what the historian and political scientist Benedict Anderson famously called an “imagined community.” We owe such communities our loyalty, and we feel pride in their achievements, pain in their stumbles, and hope for their continued success. We cooperate not just because it is in our cold pecuniary interest to do so, but because a cocktail of moral sentiments – loyalty, pride, guilt, shame, outrage, glee – make us work and root for our team.
Anderson’s focus was the rise of nationalism. But corporations try to create an analogous sense of allegiance by specifying their mission, vision, and values in lofty terms. When Chase Manhattan Bank bought J.P. Morgan in 2000, its managers assumed that they had also acquired the right to rename the organization. They soon discovered that J.P. Morgan was a more prestigious imagined community than Chase in the eyes of its customers and employees.
It is easy to see why the vision of the firm as a collaborative community is winning out in business schools and the most successful companies. One reason is that in most publicly traded corporations, shareholders are passive investors who just want to know enough about the firm to decide whether to buy or sell; they do not want to get involved in decisions.
At the same time, creating a sense of allegiance and trust by stakeholders facilitates running the show. A narrow focus on shareholders’ interests would impel all other stakeholders to pursue their narrow interests as well, increasing strife and transaction costs. The CEO may be appointed by a board of directors whose members are chosen by the shareholders, but he or she is supposed to represent and motivate the network of stakeholders that underpin the corporation’s success. The Fellows of the Harvard Corporation appoint my employer’s president, but they try to choose someone who will make us stakeholders proud.
And yet the social and political representation of business more closely resembles Friedman’s archetype. Business associations too frequently speak only on behalf of the narrow interest of the capitalist owners. In country after country – whether in Argentina, Chile, Colombia, France, Mexico, or the United Kingdom – business organizations give political voice to employers, not to the network of stakeholders.
Political representation of business per se, if well conceived, is invaluable for society. After all, economic progress requires that the invisible hand of the market be coordinated with the visible hand of the state. The cellphone industry requires the creation of property rights on the spectrum. The real estate industry needs to convince customers that their apartment building will not burn down. The IT industry would benefit if kids learned to code in school.
As these and many other examples show, business can become more efficient if governments provide the right combination of a diverse, relatively specific, and evolving set of public goods. Business associations need to interact with government in order to identify those public goods that would make economic ecosystems more productive, so that they can create more value for stakeholders.
But that task is burdened by the perception that those at the table are there to represent employers’ narrow interests, as their policy agenda – often focused on shifting the burden of taxation onto others – clearly suggests. As a consequence, governments often require that they meet in the presence of labor associations, so that employees also get a voice.
Setting the table in this tripartite way dramatically changes the nature of the conversation, by focusing it on labor and other distributive issues that could be resolved within the business network, at the expense of addressing how to supply productivity-enhancing public goods that could benefit all stakeholders. And it happens because the transformation in the conception of what a business is has yet to be reflected in the conception of what a business association should be.
Naturally, this lag leads to confrontation with other stakeholders, who must respond with their respective organizations. But if business associations could transform themselves so that they represented and gave voice to the network of stakeholders on which businesses are actually built, they could contribute enormously to the creation of a much more collaborative and inclusive society.
Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.
By Ricardo Hausmann