An Economic Crisis Brings Great Opportunities and Responsibilities For All of Us

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Troubled Asset Relief Program | Liz Edersheim | Hippocratic Oath of Business | Elizabeth Edersheim | TARP | socialism | Karl Marx | capital market | Drucker | Peter Drucker | capitalism | fundamentals of Democratic Capitalism | economic crisis | Business Strategies

If Karl Marx were alive today, he’d probably be uttering four words: “I told you so.”

He’d maintain that greed destroyed the capital market, easing the way for the triumph of socialism. Peter Drucker, the father of modern management and champion of responsible business, might reply, “Not so fast. The roots of democratic capitalism are strong. Unexpected results create great opportunities.”

Remember, investment banking has worked well for many years both in the United States and Japan. Innovations were funded, wealth was created for the broad community and management was challenged. Investment banking has created opportunities for millions of people around the world. The fundamentals of capitalism are strong. We need to reflect on four core aspets of Peter Drucker’s teachings as we get started on a new path.

1. Business is the economic engine of democracy. When business stalls, the entire economy stalls, as does democracy. It is not working today. It is our responsibility to restart our economic engine. Managers have a responsibility to the community. That is the contract we need now—the Hippocratic Oath of Business.
2. Stock markets are vehicles to finance and accelerate innovation, while broadly distributing the returns. The markets allow innovative corporations to have access to competitive capital flows, upon which the long-term wealth of our nations is built. Equity diminishes the probability of economic panics rooted in excess leverage, such as the one we are experiencing. Markets were created to let each of us—not just the Buffetts and the Gates—share in funding the investment and the gains. Rather than moving up, the middle class is sinking. That’s a formula for disaster.
3. Long-term owners in a competitive environment are the best decision makers. Owners can see the whole and responsibly make difficult trade-off decisions, such as serving both short and long-term interests and serving customers and employees. The securitization process meant that multiple layers of people were taking large fees without ownership or capital risk. The fractionation of regulation further exacerbated the whole. The financial markets of 2008 had no owners.
4. Markets provide value and are not perfect. A laissez-faire market place has no rules, and anyone who can gain an advantage is free to pursue it, potentially wiping out competitors, raising margins and controlling markets. Hence, following the depression of the 1930s was the rise of democratic capitalism, designed to serve the needs of the community while harnessing the ambition, innovation and greed of laissez-faire market players. The community insists on clear rules, which establish a level playing field, encouraging competition and innovation between banks, investment banks and broker dealers. The misguided notion of universal banking combined with the shortsighted dismantling of those regulations has undermined this balance. We cannot permit the development of monopoly capital anymore than Theodore Roosevelt permitted industrial monopolies.

It is critical to pick ourselves up and build on our strengths to create our tomorrow. We have the opportunity to collaboratively design, test and build great enterprises and opportunities around the globe. We are reengineering the global flow of capital. It is the opportunity and challenge of the century. By holding ourselves to the fundamentals of democratic capitalism and seeking opportunity and innovation, we have a chance to create opportunity for every citizen over the next 10 years.

The Troubled Asset Relief Program, TARP, is a good beginning. It is aligned with Europe and is beginning to align with the fundamentals. But it is only the beginning. Surely, for example, we can design tracking mechanisms that are available on the Internet, encourage comments and track progress and adherence to the fundamentals. Let citizens see the investments we are making, their impact and the resulting balance. It is time to recognize the Hippocratic Business Oath and, as Drucker might say, “manage for the results.”

Or to put it another way, let’s prove Marx wrong.

Contributor:   Elizabeth Edersheim

Elizabeth Haas Edersheim is a strategic consultant who works both with Fortune 500 companies and private equity investors. Prior to founding her own firm, New York Consulting Partners, Edersheim was one of the first female partners at McKinsey & Company. Her previous book, McKinsey's Marvin Bower, illustrates the business life and ideals of the founder of McKinsey, her mentor, who was a close friend and peer of Dr. Drucker. Edersheim's most recent book is The Definitive Drucker. Aside from her numerous publications, Edersheim has provided expert testimony to the U.S. Congress on industrial networking and industrial manufacturing policy. She holds a Ph.D. in operations research and industrial engineering from the Massachusetts Institute of Technology.

 

 

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