TT's Lost in Tokyo — by TokyoTom

Readers may recall my ongoing criticisms of Lew Rockwell, Stephan Kinsella and many others over their sympathy for and defense of statist mega-corporations like BP , their preference for confused attacks on “abstractions” like “the environment” (shared common or publicly-owned resources not under effective privatre control) while ignoring the role that “abstractions” like corporations playing in resolving or aggravating problems of human plan formation and conflict resolution, and for pretending that the unjustifiable state grant of limited liability to shareholders is inconsequential and has nothing to do with rapidly growing endemic/systemic corporate statism, so-called corporate “agency problems” (the struggles among, shareholders, executives, employees, and citizens groups/lawyers for control when clear owners are absent and costs/risks are externalized) and management failures in the financial industries and elsewhere?.

Clearly, the state grant of limited liability corporate status cannot be justified under libertarian principles; it was also an anathema to our Founding Fathers, who hated corporations (unlike their mistaken willingness to embed patents and copyright in the Constitution). It has long been crucial to investors choosing to incorporate (as opposed to accepting shared liability with their partners for the acts of their agents), and has had far-reaching consequences even greater than state-granted IP. Why, then, are libertarians defending ANY grants of limited liability? There are other forms of business organization available; such as sole proprietorships, classic, common-law contract-based partnerships, and “unlimited liability” corporations (American Express was an “unlimited liability” corporation for much of its history), firms whose capital is not “fully paid-in” (so that the company has a right to require shareholders to contribute more capital should existing capital be insufficient to pay debts).

In each of these cases, since shareholders have not been excused by government from potential personal liability for corporate acts (only people act, of course, but corporations have muddled all of this and become massive buck-passing machines), they retain a large tail of potential liaibility and so are all relatively incentivized to control risks that their agents may create. More exposure to risk will lead to more responsible behavior, and will abate call for more government interference. States all retain rights under the 14th Amendment to regulate different forms of business orgaizations differently, so they as well as federal regulators could lower regulatory barriers for unlimited liability corporations. 

But will capitalism collapse if voters and legislators end or disfavor limited liability corporations? Hardly: entrepreneurs, investors and shareholders might willingly choose forms of organization that do not need to be as heaviliy regulated by governments, and insurance and rating agencies would surely step into the breach with respect to the increased risk borne by shareholders – at cost of course, a cost that represents the risks that would otherwise be shifted to society as a whole. One effect would surely be a reduction in the calls by citizens groups for “corporate social responsibility” legislation.

But enough of prologue — did any readers see the rather startling – and in my mind  also rather mis-guided – piece in the January Harvard Business Review by Michael Porter (a professor at Harvard Business School) and Mark R. Kramer (a senior fellow at Harvard’s Kennedy Schoo of Government)? Entitled “The Big Idea: Creating Shared Value“, it is accompanied by an interview of Michael Porter entiled “Rethinking Capitalism“. Both are worth a review and head-scratching by LvMI and other readers.

It seems to me that Porter’s core points are the following:

The capitalist system is under siege. In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community.

Even worse, the more business has begun to embrace corporate responsibility, the more it has been blamed for society’s failures. The legitimacy of business has fallen to levels not seen in recent history. This diminished trust in business leads political leaders to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle.

A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable “solution” to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.

Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a “social responsibility” mind-set in which societal issues are at the periphery, not the core.

The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking. ….

The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy. It will also reshape capitalism and its relationship to society. Perhaps most important of all, learning how to create shared value is our best chance to legitimize business again.

An article (nay, essentially a press release) by a Harvard-related commenter at BNET (the CBS Interactive Business Netwrok) says the folllowing (emphasis added):

Few people are as associated with modern capitalism as Harvard Business School professor Michael Porter, whose theories on strategy and competitiveness have shaped the direction of countless corporations.

So his latest article in Harvard Business Review comes as a shocker. Porter… argues that companies are locked in an “outdated” approach to creating value, focused on short-term profit while forgetting what they can do to benefit society–investments, by the way, that would pay off by ensuring long-term success.

One result: People have justifiably lost trust in business and are even questioning the very notion of capitalism.

… The idea that business has sold its soul in the pursuit of quick profit is nothing new, of course. But Porter and Kramer bring to the party a wealth of knowledge on the mutual benefits derived from a linking of economic and social goals.

And they create a new vision of how to get it done, a framework they call the “principle of shared value.”

The solution “involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.”

Some of the other highlights:

New skills required. Leaders and managers must develop skills and knowledge that give them a keen appreciation of societal needs, the ability to work across profit/nonprofit boundaries, and a deep understanding of how business productivity serves more than shareholders.

Government’s role re-conceived. Regulators must create policies, regulations and laws in ways that support shared value rather than work against it.

Broaden the role of capitalism. Companies have taken too narrow a definition of capitalism. We should be looking to business to help solve the world’s great problems, the authors argue. “The moment for a new conception of capitalism is now; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.”

The full article is …is bound to be one of the most debated and discussed thought pieces in 2011, you’ll want to check it out.

Some argue that business has no obligation beyond serving customers, creating jobs and, yes, making a profit for stakeholders. Isn’t it enough that companies already bankroll the health benefits of millions of Americans? Are you one of these capitalism minimalists? Or does business have broader mission to improve the society in which it operates?

Anybody wanna tell Mr. Porter that we can “fix capitalism” simply by ending limited liability – leaving owners to replace society and governments as the parties most interested in making sure that corporate managers are not creating too much risk? 

Far from needing new principles, we need a revival of OLD ones – of self-responsibility, rather than government-enabled risk-shifting.

Here’s the 15-minute video:

[View:http://www.youtube.com/watch?v=LrsjLA2NGTU:550:0]