Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. I read a lot part of this is a professional necessity. For my work, I need to read or at least skim about a hundred articles a day on a wide array of topics. As a result, I tend to settle for getting the gist most of the time. But recently I read a book for which no gist seemed possible. It was called “Reimagining Capitalism in a World on Fire” and it was written by Rebecca Henderson of the Harvard Business School. On one level, the book was straightforward in the light of our current social and environmental crises. Some companies have begun to behave in purpose-driven instead of merely profit-driven ways. Many of these companies have seen themselves become more conventionally successful after changing their behavior. But the thing that stopped me in my tracks in this book is that I felt that an unusual argument was being made. It wasn’t that capitalism could be good—it was the capitalism should be good. It seemed like Professor Henderson and was making the argument that it was never just about profit after all. I read the book once, but then I read it a second time, then I went back and re-read certain sections. There's just something about this book that leaves me full of questions– questions I hope to ask them a guest today.

Rebecca Henderson: My name is Rebecca Henderson. I'm a professor at the Harvard Business School, where for many years I taught a course called Reimagining Capitalism and the Big Problems. Now I lead the first-year course on Leadership and Corporate Accountability.

Nathan Hunt: So, Rebecca, welcome to The Essential Podcast.

Rebecca Henderson: Nathan. It is a great pleasure to be here. Thank you very much.

Nathan Hunt: I'd love to begin our conversation at the end of your book. There's a section in which you write about losing your husband unexpectedly. To me, that section forms the moral center of the book but I'm wondering why did you choose to include that in the book? Surely it is different from the many business cases that have come before.

Rebecca Henderson: Oh, Nathan. So, first, thank you for your extraordinary engagement with the book. I appreciate it. And secondly, thank you for seeing which not everybody does. That there are essentially two arguments running in parallel in the book. And the first is a sort of straightforward, old-fashioned business that should address problems like climate change and inequality because there is an economic case for doing so. That burning the planet and having societies collapse in ruins around you is it's just bad for business. And I'm caricaturing horribly, of course. I do think there is a strong economic case for addressing the major social problems we face. But that said, I do think there's something else really important going on, and that's why I included the story about the death of my first husband. I have been talking to so-called purpose-driven managers for more than 15 years now and one of the things that are most striking in my own experience is that when you talk to business leaders and they can be CEOs, or they can be running small companies or divisions, or just doing what they can, where they work, the conversation nearly always goes like this: "I am doing this because it's the right thing for the company and here's the business case and here's how much money we're going to save and it’s going to be great," and then there'll be a pause. Sometimes the pause is long enough to get us to the bar over a beer, and then we'll start having a conversation about the state of the world and why it is so important for a business to act and often the moment in the businessperson’s life that crystallized for them, that they had a duty to do everything they could, to try and make sure that business was on the side of the angels and was making a difference. I just kept having these conversations over and over again. And my academic work is all about the intersection between personal purpose and innovation and creativity and productivity. I believe very strongly, I think there's a lot of data to suggest that people who come to work for something more than a paycheck and can inspire that and the people around them are often, you know, very significant or more successful. And then I started thinking about my own life and how my focus on this set of questions was given force and power by my first husband's death. You know, when you lose someone you love and so quickly, and so unexpectedly, it forces you to think about what matters. And so, I, I started thinking about what matters and the book is, I think, at root, a call to action for people who can see that we must, that we should do something. And yes, there's a business case. There has to be a business case because otherwise, we can't do anything, but that's not the reason to act. The reason to act as something much deeper and more fundamental.

Nathan Hunt: This goes to the heart of what I found both fascinating and challenging about your book, which is that so much seems to depend upon the actions of individuals. My concern is with the underlying structures that are inherent in the capitalist system. The core question I have for you is, do you think that capitalism itself is good or bad? Does it possess an inherent morality?

Rebecca Henderson: No, I do not think capitalism is inherently moral. If we think of capitalism broadly as reliance on free markets, open competition, and the individual ownership of assets. And we could argue, but if we think of it as roughly that set of forces, that coalition can create good things or bad things. Indeed, one of the central themes of the book is the idea that if you don't have anything to balance, the free market, a free market unchecked is a very dangerous, very dangerous thing. I mean, I sometimes use the image of tiger. Capitalism, completely unchecked and completely unbalanced, is voracious. If you tell people that there is no penalty for emitting greenhouse gases, you know, go ahead, burn all the coal burn, burn all the oil, oh yeah, thousands of people for hundreds of years will pay the cost of your doing that, but you know, that's not for you to worry about. People will do it. People will burn the oil and coal and caused the climate crisis. So, capitalism is not inherently good, but it's not inherently bad either. It's a tool. It's a tool for allocating resources for pulling people together to solve problems. And when it's aimed in the right direction and constrained by the right kinds of guardrails, it's unbelievably good. I mean, if you look at the lives we lead compared to our grandparents or our grandparents, parents. We've seen unimagined prosperity. I mean, the human race so much richer and better off than it was, you know, just 50 let alone a hundred years ago. The thing about capitalism, I think, is it has to be in balance with the rest of society, with government, with civil society and we have to remember that as a tool, its original purpose was the creation of prosperity and possibly individual freedom that before capitalism, we had feudalism, you know, you work for the local guy and that's your choice and they control most of economic life and in that context, capitalism is an incredible, both liberation of human potential and creation of real opportunity, when the rules are right. We say, hey, you know, I've said often in public, I'm a huge fan of capitalism and it's true. But I'm a huge fan of capitalism with the right construct and the original construct was creating freedom and prosperity. I mean, Charles Taylor was a Catholic scholar who invented the idea that capitalism was born in a cradle of Christianity, that it was assumed it would be constrained by real moral values and society with its own goals and aims. And that as we, as a society has become less overtly religious, those constraints have sort of crumbled away and we need to rebuild the kinds of constraints that will make capitalism a good tool for us.

Nathan Hunt: I'm wondering about the pause that you referred to earlier, the pause between the business case for an action and then the person, the moral argument that gets made over and over again, and I think the pause has a huge amount to do with what we are comfortable talking about in a business case, your book is explicit in using moral language to talk about companies. For example, you refer to companies that take a pro-social stance with their stakeholders as high-road firms. How much resistance have you encountered when using moral language, either from the companies you consult with or your colleagues at the Harvard Business School?

Rebecca Henderson: Lots of resistance. That's why I don't use it very much. I think there are two reasons we don't know, talk morally in a business context and I have more than 25-years of cumulative experience on corporate boards and so, you know, you, you don't use the moral language often in the boardroom, although you do. And I'll come back to that. I think two things are going on. One is the immediate and practical, which is yeah, yeah, yeah Rebecca, I mean, maybe we could do shoulda, you know, but should I coulda, never did anything I think for anyone, I've got to make payroll, let's be practical here. So, some of the resistance is you're a dreamer don't use moral language, it is not appropriate in the business setting. So, part of it is the kind of language of appropriateness. There's another deeper issue going on through and that I think is the idea that maximizing shareholder value is a moral thing to do and to introduce morality as a way of pulling people away from maximizing profits is a huge mistake. You see that in the debate about shareholders and stakeholders. With many people concern, they say, well, if you make the firm accountable to stakeholders, there'll be accountable to no one that will betray their responsibilities to invest and potentially gum up the free market. And even if you believe that the fundamental duty of the manager is to return a decent return to the investor and to play in the competitive market, as hard as they can. Then to do anything else is immoral, is not worth doing. Now, of course, the idea that maximizing shareholder value and having as your first duty returning funds to the investor, the idea that that is a moral thing to do is rooted in assumptions about the way the world works that I think is probably incorrect, but under some circumstances makes sense. What's so odd is sometimes when people say, well, don't bring moral language in they're in fact, making a moral argument. And I've seen that in the boardroom to do anything other than to maximize profits is morally suspect. And so, don't go talking to us about what could do or should do. This is the highest calling.

Nathan Hunt: This seems to place a huge burden on individuals and their sense of moral purpose. I hear people say that employees today, particularly millennials prefer to work for a company that shares their moral values, but that sounds like confusing cause and effect to me. There's still that requirement for someone to take a stand that is outside of the mainstream. What causes an individual, a CEO, or a senior-level executive in an intensely competitive market to take a pro-social stand?

Rebecca Henderson: I spent nearly 20 years at MIT, as the Eastman Kodak Professor of Management. That was a coincidence, but it was deeply ironic because that's what I did. I started large firms trying to respond as the world around them changed. And what I learned by and large is that unless someone consciously, decides to do things differently are an enormous inertial machine that just keeps playing out the routines and procedures they've developed over many years, and that has worked very well for them. That's incredibly hard to get them to do anything different. I mean, I spent six months in my life in Finland trying to persuade Nokia that Apple was a huge threat to their business. Many people now, particularly my students look at me and say, well Nokia, what was Nokia? So, you said to say, well, you know, this sounds kind of hard, Rebecca. Like, uh, someone has taken a moral stand. They have to stand up and do things differently. They do. That's what changes systems. And is it hard? Of course. But in fact, I think in many ways it's easier than what I was asking Nokia to do, or in fact, I worked with Kodak, what I was asking Kodak to do, that standing up and saying something is badly wrong. That is this moment. I mean, Nathan, I don't want to be overly dramatic, but you must have noticed that things are not going frightfully well. Buyers in California, an unchecked pandemic, massive political strains right across the world, not just here in the U.S.– something is off. Significant productivity gains over the last 20 years, nearly all of it gone to the top 10% of the population. Everybody else is not so pleased about that. That's got wound around with nativism of various kinds. I mean, to me, the question works the other way up. How can you just put your head down and keep doing what you've always done? The same old thing is not going to address these problems. So, I think if this is a feature, not a bug. That the good news is that is an economic case that enables you to say what you can see, which is this is not working, and we have to do something differently.

Nathan Hunt: Is it fundamentally a return to a morality that once existed within capitalism? We can go back to Adam Smith and his theory of moral sentiments where part of his understanding of capitalism was that we would have fundamental sympathy as social beings, or is it something fundamentally new? Do you think that the current social and environmental crises are severe enough to trigger a new moral standard?

Rebecca Henderson: I think at root it's a return. That for many years, we've told ourselves that societies can be healthy and that indeed it's the morally correct thing to do. Just to put your head down, run your own business, maximize your profits, don't need to worry about anything else. That's an odd idea. I think if you go back 50 or 60 years in the U.S. to the '50s and '60s right after the second war, indeed, if you go to Germany or Japan today, the idea that it's enough simply to run your business and maximize your profits would seem very odd. And more than that, the idea that you can focus only on yourself and your own wellbeing, and you don't have to think about the long term or the good of the community, that would be considered very strange. I mean no disrespect, but my reading of all of the world's great faith traditions is that focusing only on yourself and the current moment is a very unskillful way to live. And you could read the family, the community, the faith community as being about supporting people in focusing on the longer term and their relationships to other people and the importance of living up to their relationships. And so to me, this moment is a moment of rediscovery, that, oh yeah, right. It really matters. No one is healthy, unless we're all healthy. It really matters that I pay attention to the health of the community. Now, in that I think we're returning to an, an old understanding of what it means to be human and what it means to be a businessperson. I think the new element is asking what are the institutions that will support that morality? Because, you know, I was trained as an engineer and an economist, and while I think we need to think differently about who we are and what our purpose is, I'm a huge fan of changing the rules and building the institutional structure that will hold us to our best selves. So we need a political revolution too, or a political rediscovering. The idea that a strong democratically accountable, transparent government working in partnership with business is the way to focus on the long term is again an old idea, but how do we do that in a global world? Whoa, you know, how do we find the measurements that will hold companies to account? How do we make sure that we regulate greenhouse gas emissions so that we really tackle the problem of climate change? So it's not like, oh, let's just go back to, you know, love one another right now. And back to the morality of the '50s without the racism and the misogyny of course, and we'll be all set. No, no, no. It's how do we use our sense of what we need to do to solve these problems, to inform the institutions and the conversations and the constraints that will allow us to rediscover capitalism?

Nathan Hunt: I find this very inspiring. But I'm struck by the fact that there isn't just one morality at play here. There are two competing moralities. There is an idea in Anglo American capitalism, that profit maximization is not just morally neutral, but actually a moral imperative. Call it what you will, the Protestant ethic or prosperity theology, but it has a strong hold on the American psyche. How do you reimagine capitalism for world on fire when a certain number of people think that they have a moral obligation to make as much money as possible and their carbon footprint be damned?

Rebecca Henderson: My reading of the economic, political and philosophical theory that gave us maximize shareholder value as a moral duty is that it assumed the competitive market was genuinely free and genuinely fair. And what does that mean? Technically taking a hit means that prices reflect real costs. But to me, it's quite clear that at the moment the market is not free or fair because most obviously we can cause enormous harm to the people around us and to future generations and not pay for it. So, technically we could call that a massive negative externality, but you know, I, I prefer to think of it as you get to dump garbage, the people around you and not pay for it, and that is not a free or fair market. The magnitude of this effect is so large. One of my colleagues has recently calculated the environmental damages caused by emissions of greenhouse gases for 1800 of the largest companies in the world. And he finds that for a third of these companies. The damage is of the same order of magnitude as their revenues and for more it's on the same order of magnitude as their profits. This is a huge effect. It's not like the market is a little bit out of whack. It's massively out of whack and let's just take a moment to focus on opportunity. The free market is amazing in its ability to allow in principle anyone to start their own business and to compete and innovate and to build their own lives, but if a very significant fraction of the population starts the competitive race with weights on their feet, because they happen to be born in the wrong zip code, didn't get enough to eat, as children have parents who are working two jobs and never home, and can't support them in schools and have substandard schools, that's not free opportunity. So to me, it's the people who are most excited about the free market, who should be most aware that they have, if they really believe it, they have a duty to fix these problems.

Nathan Hunt: Rebecca, throughout the book, you talk about these inspiring examples of executives who are behaving in pro-social ways. And it struck me when I was reading this, that in some ways I, and many of my colleagues at S&P Global are not alone, we're all taking a moral journey together. But I want to ask you about someone you very much did not include in your book. You are, I'm guessing, familiar with Martin Shkreli, the hedge fund manager and pharmaceutical executive who jacked up the price of a common treatment for toxoplasmosis from $13.50 a pill to $750 a pill. Mr. Shkreli is now in jail, but not for overcharging for basic medicines. In a world where there are many, many Martin Shkrelis and many people willing to invest in companies run by the Martin Shkrelis of the world. How do we avoid the prisoner's dilemma? How do we avoid feeling like the only suckers who care enough to do the right thing?

Rebecca Henderson: By making sure people like Mr. Shkreli can't do what they did. My book is not about purpose- driven leaders can save the world, if only we all embraced purpose, we'd be fine. My book is about purpose-driven leaders can make some money and as they begin to make money, it will become very clear to them that we have a prisoner's dilemma problem on our hands, and we need to enforce the collective equilibrium. So I can start as a company thinking deforestation is a really bad thing and that I should only buy products that don't involve deforestation. And as I start to do that, I find like, Whoa, that's super expensive and my competitors are happily buying old growth forests or products grown on land, taken from old growth forest, and I'm at a competitive disadvantage, so what can I do? Well I can get other purpose-driven leaders to join me? Because remember we do have a business case, our brands are under pressure. We need to find a way to stop deforest. And if that doesn't work, I can start with working with local governments and local communities to say, look, deforestation is not in your long-term interest. I know you want to stop it. How can we help you? What kinds of rules and regulations? And we're seeing that, not just in food where this is really happening, but in textiles where severe problems of human rights in the supply chain and the only answer is to try and build cooperation and to work with governments. I do have friends who think the world would be saved if we could all undergo a moral revolution. But I don't think so. I think in the end, the only way to build a sustainable just capitalism is to change the rules of the game to make it impossible to jack up the price of lifesaving drugs. But at the moment we live in a world where people say, well, you know, he was just maximizing profits, no problem, you know, all power to him, maybe a little bit visible and he should have been a bit more discreet. That needs to change. No one now says, you know, of course I employ children, I mean, they're very cheap and they have great manual dexterity and who wouldn't employ children? No. Employing children is wrong. And we don't just say it's wrong, we have laws against it. And we need to do that on a host of fronts around opportunity, around inclusion, around our environmental crises. So it's not that morality is enough, it is that it is an incredibly powerful tool for driving change and building new modes of cooperation.

Nathan Hunt: Rebecca, I'd like to thank you for joining me on the podcast. I am sad to tell you that you've actually just given me more to think about, so I'm even farther from having just the gist of the book: “Reimagining Capitalism in a World on Fire.” But I thank you for writing it because it has given me so much to chew on.

Rebecca Henderson: Nathan, thank you very much. This has been an extraordinarily interesting conversation, and yes, I think in some ways we're asking the really hard question, which is, what drives profound systemic change in a global system? And we don't know.

Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kurt Burger and Lundon Lafci. At S&P Global we accelerate progress in the world by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. I am Nathan Hunt from my home studio, high atop Manhattan's Greenwich Village, thank you for listening.

The Essential Podcast is edited and produced by Molly Mintz.