Restoring Capitalism through Ownership-based Governance

untitled“Business leaders today face a choice:  We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public,” says Dominic Barton in his Harvard Business Review article.

The McKinsey global managing director has spent the past 18 months talking to more than 400 business and government leaders across the globe.  He concludes that capitalism has been and can continue to be the greatest engine of prosperity ever devised.  However, if the fundamental issues revealed in the recent crisis remain unaddressed and the system fails again, “the social contract between capitalism and the citizenry could rupture, with unpredictable but severely damaging results.”

Barton confirms that boards must become more effective, representing a firm’s owners and serve as the agent of long-term value creation. Being a director is also a much bigger job, requiring more time and deeper understanding of the company and its strategy.  He makes many of the same points that Fred Steingraber and I make in our article in Corporate Finance Review, “What Boards Need to Do to Preserve Their Relevance and Provide Value in the World of the New Normal.”

There is an urgency for management and boards to work together to fight the tyranny of short-termism, and “infuse their organizations with the perspective” that serving the interest of all stakeholders is an essential to maximizing corporate value.  Finally, boards need to bolstered to govern like owners.

Inaction will produce the most negative consequences.