The early evidence was promising. There was the Arab Spring, in which citizens across the Middle East used Twitter and YouTube to organize mass demonstrations against oppressive regimes in their respective countries. The Occupy movement, a populist response to the greed and corruption that caused the late-’00s financial collapse, was largely a product of social media activism, as were the anti-austerity protests that took place in Greece and Spain in the early 2010s. Later, Twitter was used to bring attention to police brutality against African-American citizens in the U.S. Even WikiLeaks was viewed favorably in those days, as many believed it was a means to radical governmental transparency

No platform seemed to embody this democratic ethos more than Facebook, whose stated mission was “to give people the power to build community and bring the world closer together.”

Oh, how naive we were to believe them. Facebook, once believed to be a vehicle for creating a more democratic global society, has instead become a means for sowing division and inequality. Facebook’s devolution in this regard is a sadly perfect example of how a company falters when it succumbs to pressure from shareholders and fails to make sustainability a priority.

Facebook quickly emerged as the single largest media network in human history, and widely-held belief was that it would be an instrument for good — a true marketplace of ideas, that would help would usher in an era of unprecedented social and political activism, and foster equality and democracy all throughout the world.

That seems laughable given what we now know. “Facebook was fatally flawed from the start,” says Harvard Business School professor Geoffrey Jones. “It’s business model was entirely based on acquiring customer data for free and selling it for profit. Of course they kept quiet about that in their mission statements.”

Over the past several years, Facebook’s network has been a haven for disinformation, illegal political surveillance, election meddling, right-wing extremism and all kinds of contempt, harassment and bad faith political debate. More recently, Facebook was exposed for mounting a smear campaign against activist investor George Soros after he criticized Facebook at the 2017 World Economic Forum, then attacking The New York Times for exposing its malfeasance.

In trying to please its shareholders and placing short-term profits ahead of long-term sustainability, Facebook lost sight of its mission. Instead of worrying about its social impact, Facebook was singularly obsessed with its ad platform. It developed laser-precise ad targeting capabilities while simultaneously throttling the number of people brands could reach organically, forcing brands to purchase ad space instead.

The stock price soared, but the platform suffered. News feeds were flooded with narrowly-targeted posts that damaged the user experience. And the problem ran much deeper than annoying, sometimes creepy ads. Facebook allowed unchecked ads, fake news and political division to proliferate, and in doing so, created a number of pressing issues for both the company and society at large.

The negative impacts of short-term thinking extend far beyond a single company, however. The two most pressing problems facing our world today — global warming, and financial inequality — are both symptoms of a flawed economic system that values quick and dirty returns over sustainability.

Capitalism is often cited as the most effective vehicle for lifting people out of poverty, and for a time, that might have been true. But we’ve experienced a colossal shift in how companies conduct business over the past century. Businesses abandoned long-term, socially conscious goals during the globalization of the 1980s and ’90s, instead turning their focus to pleasing Wall Street and delivering short-term gains.

The result has been an alarming increase in income inequality. And that inequality can be blamed as for the recent increase in nationalism, populist unrest and demagoguery across the globe. Experts have already started predicting an economic breakdown even more catastrophic than 2008–2009 that will in turn spark a large-scale international military conflict. World War III, essentially. And the U.N., in its alarming global warming report last year, said our short-sighted business system is largely to blame for our impending doom.

The solution is to fundamentally change our current financial structure, such that long-term goals are paramount.

“I’m convinced that one of society’s most vexing problems is the relentlessly short-term orientation that manifests itself in investing, in business decision-making, and in our politics,” billionaire hedge fund manager Seth Klarman told a group of Harvard Business School students last December. “It’s a choice to attempt to maximize corporate results over the very short run and a different and sometimes harder decision to take a longer-term view.”.

Many companies have already made social responsibility a core tenet of their business. Investment firm BlackRock now requires its portfolio companies demonstrate how they benefit society. Economists have laid out a blueprint for how companies can help decrease inequality — namely, by investing in infrastructure, green energy, job training and health programs.

The best news is that long-term thinking doesn’t have to come at the expense of a business’ bottom line. Research has consistently shown that companies that prioritize social and environmental sustainability perform betterfinancially than companies that don’t.

Making the difficult choice — to prioritize long-term success; to be socially responsible; to let everyone reap the benefits of capitalism, instead of a privileged few — is not only the right thing to do, it’s good business.

After years of insisting it was “just a platform” and abdicating responsibility for the accuracy of information on its network, Facebook says it’s finally taking fakes news seriously. It’s hard to see the effort as anything other than a cynical effort to regain the public’s trust after losing users in droves. But it’s a positive sign, nonetheless.

The change won’t be good just for Facebook and its bottom line, but for all of us.

The post How Facebook, the company that said it wanted to bring the world together, became the great divider appeared first on Jonathan Wichmann.

I will argue that Wikipedia – the no. 5 most visited website in the world – is the best thing on the Internet. It’s free, there are no ads, the knowledge is so vast, and it’s user-generated. 

With Wikipedia, we witness what the Internet can also be. That’s really important to remember, not least amid the so-called “tech backlash”. 

Therefore, I was pleased when Jimmy Wales, founder of Wikipedia, agreed to talk. 

In recent years, Jimmy has been very outspoken against a media world broken by click-bait, fake news and populism. And in 2017, he launched WikiTribune, “a news website where volunteers write and curate articles about widely publicised news by proofreading, fact-checking, suggesting possible changes, and adding sources from other, usually long established outlets,” according to Wikipedia.

Below is an edited transcript of my interview with Jimmy Wales.

* * *

PART I:  CREATING A FREE ENCYCLOPAEDIA FOR EVERYONE

Jonathan: In your own words, what is the “philosophy” of Wikipedia? 

Jimmy: Well, the vision for Wikipedia is a free encyclopaedia for every single person on the planet in their own language. And by “free” I mean freely licensed and not just that you don’t have to pay money to use it. But that everything in Wikipedia should be freely licensed as much as possible. So it’s possible to copy and modify it, redistribute it, redistribute modified versions. You can do all of the things commercially, or non-commercially. 

So when a community is contributing to Wikipedia they aren’t just contributing to this one humanitarian project, they’re contributing to a storehouse of knowledge that can be used for all kinds of other things. So we see people doing all kinds of interesting things with Wikipedia work.

Jonathan: Why did Wikipedia become such a success?

Jimmy: Because it’s awesome and everybody loves it… No, I mean basically the public has a great desire for high quality, neutral information. And that’s what we strive to provide. It has of course only intensified in recent years as we’ve seen business models of journalism destroyed or leading in some very unpleasant directions. Now more than ever there is a gap in terms of there not being enough quality information out there. So the demand is higher than ever.

Jonathan: You never monetised Wikipedia. Was that the idea from the beginning? And how important was that?

Jimmy: In the beginning, I didn’t really give it much thought, one way or the other. I mean, Wikipedia was a project. It was a thing that I thought needed doing. And then very early on it became apparent that it would make more sense to do it as a non-profit. A lot of the volunteers wanted it like that, and it made sense to me aesthetically that it’s like a library or a museum. It just fits better into that structure.

Jonathan: But let’s say you had monetised it and placed ads on it or whatever. The credibility would have taken a hit…

Jimmy: Yeah, of course. And of course lately we see a lot of the reputational damage that’s coming to a lot of the Internet giants, because their business models do drive them in the direction of over-exploitation of data and so forth. Whereas for us, we don’t sell your data. We don’t even collect much data. For us, it’s not about that. It’s about the content, and it’s about creating a free encyclopaedia for everyone.

Jonathan: What are the biggest challenges facing Wikipedia today?

Jimmy: Well, one thing that we really do take seriously and pay close attention to is what we call community health. Meaning that the people in the community who are creating the content are having fun and that they are doing good quality work. And that the right people are empowered to take their work forward. That’s one of the key things that we focus on. 

And then another thing is that we’re seeing the growth of the Internet now in the developing world, and we want to see the growth of Wikipedia in the languages of the developing world. Because, as I said, the dream of Wikipedia is a free encyclopaedia for every single person on the planet. So that’s really important to us.

Jonathan: Many years ago, when I first heard of Wikipedia, a friend described the idea to me as “when you have enough people working for free on something exciting, and you have the proper rules set up, then the good in people will win in the end”. I think, given what we’ve also seen on the Internet, that was maybe a bit naïve. But still… what can we learn from Wikipedia? Is there a lesson here for businesses and maybe for society at large?

Jimmy: There’s a lot of things that we can learn from Wikipedia. One of the most important things is that the vast majority of people are basically decent. So whatever problems you might have on the internet, they’re more a problem of design. It’s not that people are terrible.  Another big lesson of Wikipedia is of course the power of collaboration. And that’s obviously incredibly important in all kinds of areas today.

* * *

PART II:  FAKE NEWS, LOCAL JOURNALISM AND WIKITRIBUNE

Jonathan: What’s your take on the misinformation that we’ve seen in recent years on the web? How big is that problem? And do you see a way to reduce it? 

Jimmy: I think it is a problem. For me, the problems that get the most attention actually are not necessarily the most important problems. One problem that gets far too little attention is the destruction of local journalism. People do take note of it, but it’s not headline news every day in the same way as fake news, for example. But I think that’s really one of the most important negative trends today. That things are going silent in terms of actual news from smaller towns and communities. That’s very bad for democracy. And it’s very bad for corruption too.

Jonathan: Do you see a solution to this problem, or at least a way to reduce it?

Jimmy: Well, I hope so. I’m doing all I can with WikiTribune to try to find new ways to bring communities into journalism in a healthy way. Hopefully, that work will show some new interesting insights, but I don’t have a simple magic answer. I don’t think there are any simple magic answers.

Jonathan: This whole development, has it made you less optimistic about what user generated content can do?

Jimmy: No, no, no. Not at all. Almost all of this problem is the problem of professionally produced bad content, not consumers. The fault lies with the business models that are rewarding professionally produced lies – and that’s a huge problem.

Jonathan: How is WikiTribune going?

Jimmy: Well, that’s what I spend most of my time working on. I just spent the whole day working on the design and implementation of our new software which is going out soon, and we’ve got a community who are doing journalism. It’s a pilot project, and I can’t say that we’ve completely figured it out. But that’s the nature of a pilot project. There’s a lot of exploration and learning, so that’s the stage we’re in.

Jonathan: How do you think people will use WikiTribune. Will they go there first or is it more a place to check the news after they’ve seen it elsewhere?

Jimmy: Currently, we’re exclusively focused on the community. So we don’t focus on getting traffic and all of that. That’s one of the problems with most news sites: The desperate search for clicks. And we don’t want to focus on that. I want to focus on quality. I want to focus on thoughtful people. So we don’t really look at that. 

The concern right now is to say what can the community do? How do we help them do it? How do we innovate solutions to real problems that people have when they participate in a thoughtful way in the process of journalism? So that’s really what we look at.

Jonathan: So essentially it’s similar to Wikipedia, in the sense that the idea is that if you create something that is really valuable, then people will find it sooner or later?

Jimmy: Yeah, exactly.

* * *

PART III:  THE BIG FOUR & THE FUTURE OF THE INTERNET

Jonathan: What’s your view of The Big Four – Amazon, Google, Facebook and Apple? Is it a problem that they are so big?

Jimmy Wales: No, I don’t think so. I think they’re growing because they provide great services that people like to use. Obviously, there are many concerns about different things they’re doing. And there are certainly things they should do better. But I think as a whole, it doesn’t really make sense to sort of say ’well they’re big, therefore they’re bad’. That’s kind of silly. 

I also think that people don’t easily remember how vulnerable giant companies are and can be. One example is Microsoft. It was once thought to be completely invincible, but in many areas of technology they are completely irrelevant these days. They’re not on the cutting edge in many areas even though they try really hard to be. 

Similarly, we may think that Facebook is in this incredibly dominant position. But that’s not guaranteed to last. And as long as we have an open Internet there’s always a possibility of competitors coming up with the better business model that better satisfies what people really want. And, obviously, Facebook had best pay attention to that.

Jonathan: In recent years, we’ve seen that for example the EU has handed out big fines to Google, Apple and Facebook among others. They want big tech to be held accountable. What is your take on that whole discussion about platforms as publishers and increased regulation?

Jimmy: It’s hard to have a very short take on this. But I think the idea of platforms as publishers is incredibly dangerous and incoherent. So we have to fight that in every way possible. I think we are in an era where we’re only beginning to understand the ramifications of for example paid political advertising that is not being disclosed properly, and those kinds of things. 

So, I’m very reluctant to say we need to pass new regulations because it’s really hard to know exactly which regulations would work and would actually help with the problem. And certainly, if we have governments intervening in the free flow of information, well, that will do nothing to restore public trust in institutions and governments. In fact, it will very much undermine it.

Jonathan: It is what you hear a lot these days: That we need stricter regulations for Facebook, for instance. Some people even say that these companies should become public utilities, Google as well…

Jimmy: Well, that’s just idiotic. I mean, that’s just completely idiotic. And it’s also impossible. So it’s not coherent to even discuss.

Jonathan: What’s the future of the Internet and social media? Where do you see this heading?

Jimmy: Well, I always say if I knew what was going to happen next, if I knew what the next big thing will be, I would be busy creating it. 

I think it’s really hard to know. But we’re not yet at the end of this really big mega-trend (the Internet age, ed.). So we’ve got a long way to go in terms of getting the rest of the planet on the Internet. That’s going to be a huge thing, with a huge social impact across all societies. 

The switch to smartphones is also still not complete, and we are not stable in terms of knowing how people can and will use smartphones and data. There’s still a lot of innovation going on there. 

There’s a lot of the obvious things that are going to happen. But then there’s always things that are surprising that we haven’t foreseen. And I don’t know yet exactly what those are going to do. But I think a lot is going to change.

* * *

PART IV: PROGRESS, REGRESS, EDUCATION AND AI

Jonathan: What’s your sentiment in general? Do you think things are getting better or worse? Or is it just more of the same?

Jimmy: If we’re referring to the Internet, then I probably have a different answer for it than if we talk about the world as a whole. But even then, however you want to answer it, some things are getting better and some things are getting worse. 

One of the things that we can look at is the history of first the Millennium Development Goals, what we now call the Sustainable Development Goals. What we see is that once you start to quantify certain things like extreme poverty, then you see dramatic progress. And that’s an amazing thing that people forget. We’ve made an enormous amount of progress towards eliminating extreme poverty – and for the planet that’s really important. 

At the same time you can look at issues around democracy in the West and there’s a lot of bad things that have happened, a lot of bad things are going on. We see things like Brexit and Trump. We see a lot of undermining of democratic notions. The rise of nationalism throughout Europe which is a very ominous thing to see. Those are not good trends, so I don’t think it’s really easy to have a simple view on this.

Jonathan: Some people say that the educational sector is ripe for disruption. And that it’s an area where things need to change soon if we want to reduce income inequality. What do you think? 

Jimmy: Well, so far we’ve seen huge changes in informal education, and very, very few changes in formal education. What I mean by that is that if you look around the world, at the trends, at the number of people completing a university education, then it’s pretty stable. It’s getting slightly better every year, but no dramatic shifts are happening. 

But when we look at sphere of informal learning, then it’s a completely different universe. In informal ways, people are learning things far more than ever before. They are becoming skilled in lots of new ways. 

That’s an interesting trend. But it’s hard to know what it means exactly. Does it mean that we should lament the lack of innovation in formal education? Or does it mean that formal education becomes less important over time as people have other avenues? 

So I don’t know, I think it’s really hard to predict.

Jonathan: Another hot topic is AI, of course. Which is also related to work and education. I mean, what do we need to learn? What will work look like in the future? And so on.

Jimmy: Yes, another hot topic. And there’s a lot going on there. But I think in some ways we’re not as far along as people think we are. And in other ways we are further along than people think we are. So I think most people have a pretty weak grasp of exactly what is possible – and of what is hard and what is easy. Therefore, it’s really hard for people to judge what things mean. 

For example, if you look at things like Siri or Alexa, then people can be incredibly impressed. But the technology is not that smart. It’s not genuine artificial intelligence, it’s just a handful of good user interface tricks. Obviously, advances have been made there, but we are very far from full human level AI. 

At the same time a lot of the new stuff around machine learning and deep learning algorithms is super interesting, and we are making progress towards something more powerful than we’ve seen before. So I don’t know… I’m not an expert in that area.

Jonathan: But I assume you’ve had some discussions at Wikipedia around AI and how that could be applied, or?

Jimmy: We have, but it’s been very minimal. We’re so human oriented. We’re not really particularly technological, as a project. Obviously, we use technology, but Wikipedia is a social invention, not a technological invention. So we’re not saying “oh in five years’ time Wikipedia entries will be written by AI”. That’s complete nonsense and it won’t happen. So we’re not working on it because it just seems too far away right now.

The post Wikipedia founder Jimmy Wales talks clickbait, fake news, the information wars and how to fix a broken internet appeared first on Jonathan Wichmann.

Today, John Fullerton still works with finance, but in a completely different way. He’s the founder and president of Capital Institute which is “a collaborative working to explore and effect economic transition to a more just, regenerative, and thus sustainable way of living on this earth through the transformation of finance.”

Among other things, Fullerton has put out a vision or framework for a new economic system, entitled “Regenerative Capitalism: How Universal Principles and Patterns Will Shape Our New Economy” (2015).

“In many ways, our problem is that the finance system behaves and believes that it’s on top of the economic system, driving it, when it needs to see itself underneath it, in service of it,” he has said.

That’s quite a shift from the derivatives market in the late 90s.

So, as part of my interview series, I caught up with him to learn more about his thinking and his vision for a new economy. And why he left Wall Street in the first place.

Below is an edited transcript of our conversation.

* * *

PART I: LIFE AFTER WALL STREET

Jonathan: Why did you leave Wall Street?

John: A lot of people probably think, particularly given the 2008 crisis and what not, that I kind of woke up one day and was tired of working for the bad guys and needed to redeem my soul. But the truth is that, first of all, I worked on Wall Street from 1982 to 2001 and left long before the financial crisis. Also, I had been itching to leave for years and it had much more to do with me personally and questioning what I was doing with my life than with all the bad behavior that we associate with Wall Street. And to be honest, when the financial crisis happened eight years after I left I was just as shocked by the behavior as pretty much everyone else. Both the scale and the audacity of it.

When I left Wall Street in 2001, I honestly I had no idea what I was going to do other than I was tired of doing what I was doing. And so I took the summer off.

A few months later, I had a meeting with the CEO of a charter school management company. Having invested Morgan’s money in charter school pioneer Edison Schools, I was intrigued with the education problem and thinking about starting a nonprofit charter school management company myself. The company’s office was on lower Broadway, in downtown Manhattan, and the meeting happened to be at 9:30 in the morning on September 11^th. I was on my way in the subway and got to City Hall and the train stopped, and when I got to the street the second plane had literally just hit. It took me all day to get home before embracing my wife and three young children in the driveway.

I was already “unemployed” and trying to figure out what to do with my life and then that happened…

Jonathan: Where did all of this leave you?

John: It really put me into a pretty deep introspective period of my life, and I spent the next 6 or 7 years dabbling in various for-profit enterprises, in what we now call ”impact investing” and in the asset management business. But really, I was trying to figure out what the hell was going on and I was reading tons and tons of books. And it was in that period that I discovered the environmental crisis as a systemic issue. And I discovered that there was such a thing as system science.

One of the very profound books I read is a book called The Limits to Growth by a team of MIT system scientists. Lead author was Donella Meadows. It had been published in the 1972 and it was ridiculed at the time. But it essentially raised the question if exponential growth on a finite planet is possible. And that question is really at the heart of our environmental crises right now.

So for whatever reason, better or worse, I kind of got hooked on these very profound fundamental existential questions about how our economic system operates and the conflict between the assumptions of economics and the physical realities of physics, chemistry, ecology and the biosphere systems.

So, I think about climate change as a symptom of a problem itself.

* * *

PART II: SYSTEMS SCIENCE

Jonathan: You mentioned systems science and the environmental crisis as a systemic issue. I know that’s very much part of your thinking today. And you also talk about the transition to a regenerative economy. How does all of this work?

John: I haven’t written an actual book on this, but I am working on one. However, I do have this long paper out (“Regenerative Capitalism”, ed.) which we often refer to as our source code, and which is kind of my cumulative learning and articulation of a regenerative system, a regenerative approach to economics.  But it’s a work in progress.

At the core of it is the idea that all living systems – if they’re still around – have learned how to sustain themselves over long periods of time. In the biomimicry field they like to say that nature has practised for 3.8 billion years. I think the challenge with the human economy is that ever since the beginning of the modern age we’ve seen ourselves as separate from nature, not embedded in nature. And so there’s unquestioned assumptions about how economics can work that presume that the human economy is separate from the biosphere, leading to ideas like natural resources are simply “inputs” to the economic system.

My simple idea is that unless we rethink our economics and align them with these well understood patterns and principles of how living systems work, then we’re going to be constantly experiencing these unintended consequences or symptoms of a system that is fundamentally unsustainable over the long term.

Our current economic system is designed to, in my old language, optimize risk adjusted return on capital. So we’ve now got this massive accumulation of financial capital, but it has come at the expense of an ever-increasing erosion of our natural capital and increasingly, our social capital as well as inequality rises to levels not seen since the Gilded Age. And the better we are at executing the system we’ve designed, the more it undermines the viability of the system itself.

Jonathan: One of the business historians I spoke to, Geoffrey Jones from Harvard Business School, he talked about how when reading through all the deans on record speaking to the classes it was very clear that the idea of sustainability or at least business behaving in a responsible way is not new at all. They all spoke about it up until the 1970s – and then it went away. But now it’s back again. It coincides with the rise of the financial markets from the 70s and onwards…

John: Yes, but this idea about shareholder value… I don’t think it was designed to be an evil thing. It was designed to make business more efficient. But it was a misconceived purpose of business which is to maximize shareholder wealth as opposed to stakeholder wealth broadly defined inclusive of the resiliency of the natural world upon which all living beings depend. But you’re absolutely right, this is not a new idea.

I was asked to give a talk at a Deming Institute conference a few years ago, and W. Edwards Deming was this great business consultant, or business philosopher if you will, and he was talking about the same systems approach to business back in the 50s and 60s.

So it’s really a relatively temporal challenge, but unfortunately the finance ideology has so dominated even our unquestioned assumptions that we’re kind of lost in this trap of believing that unless your decisions are driven by short-term financial optimization you are inefficient and will lose in the competitive battle of business.

That’s another aspect of my own personal journey where I had this sort of a rolling epiphany where I woke up and realized that I was now this young derivatives whippersnapper hotshot. And I realized it was people like me who think they’re so smart who are actually the root cause of the problem.

* * *

PART III: IN THE RIGHT RELATIONSHIP

Jonathan: Let’s go back to the systems science and your regenerative approach to economics. How is this different from sustainable business as we know it?

John: If you could summarize the past 25 years of sustainable business and sustainable finance, it would be centered around this quest for transparency, ESG, SRI, multiple capitals and essentially having business be accountable to report their environmental footprint and their social behavior.

What I say is that of course transparency is good, and of course raising these issues and having management and boards of directors wrestling with these hard questions is a positive. But in living systems there are a number of first principles, and if we look at it that way, then the first principle that has been in a sense violated in the way public corporations operate is the principle that I call “In right relationship”.

There’s no sort of hierarchy of principles in living systems. But if you would had to pick one that’s at the top or near the top it would be the idea that all the component parts in a system need to be in a healthy symbiotic “right” relationship with each other, making the ”whole” greater than sum of the parts. 

This is true at a molecular level like the relationship between hydrogen and oxygen. That symbiotic right relationship creates water and water unlocks the potential for all life.  It’s true of a sports team, and of course of a human body.  And it goes all the way out to the relationship between our planet and the Sun. It’s just exactly right or we wouldn’t be able to have this conversation. And it also goes for everything in between.

Now if you go to our modern financial system, one of the things we’re most proud of is our liquid capital markets. The trading on stock exchanges and the financialization of everything from commodities to future salaries of baseball stars… We thought that would be good as the economists argue that efficiency is good for economic growth because it lowers the cost of capital. But what we’ve missed is that it has created a much more fundamental problem.

If we go back to the basic business enterprise and the critical relationships of any business, then one relationship obviously is the relationship between the customer and the company. One is between management and employees. One is between the board of directors and the management. But one really critical relationship is between the owners of the company and the company. And just like a house with an absentee owner tend to not be taken care of, what capital markets have done is systematically severed the relationship between their true owners of the business and the business itself.

And now instead of any true sense of responsible ownership, then what happens in the vast majority of public companies today is that they have abdicated that ownership role to intermediaries who largely speculate in stocks as opposed to take on that long-term ownership role with the genuine responsibility that goes with it. And even if they vote their proxies and do all the “good things” they should do, they only own tiny pieces of lots and lots of companies. So they can’t possibly behave as true owners.

I would say that that lack of relationship between real investors and real enterprises is at the heart of why it’s so difficult for business to get off this short-term stock price bandwagon that they’re on. And all the transparency in the world can’t solve that problem.

Jonathan: But how can companies who want to pursue longterm visions get it right then? Do they need to leave the stock market all together?

John: I’m not suggesting there’s any easy answers to this. But in general, I would argue that they could remain on the public market if they had three to five large institutional investors who collectively owned a third to a half of the business. Then these investors would effectively have control over the long-term decision making, and then you would have a public company with a “right relationship” with some core owners.  And then you would have a chance of responsible decision-making.  But certainly no guarantee!

Certainly, being a private company would be an alternative way to solve it, but it doesn’t need to be private.  And we know plenty of private companies that don’t behave responsibly. 

* * *

PART IV: REGENERATIVE COMMUNITIES

Jonathan: So you’ve developed this framework or source code for a regenerative approach to economics. What is the framework about?

John: The core of the framework is the principles, and importantly, a shift from reductionist thinking to holistic thinking – that is, seeing the system as a whole.  And I’m not at all suggesting these principles are the correct or “right” answers. There’s lots of ways to describe a complex system. This is just one person’s best attempt to reduce the principles to a manageable number and yet have enough granularity that it actually means something.

There’s lots of different ways you could describe the principles of a living system and have it be applicable to a human economy. It’s just the way I’ve done it, and people seem to resonate with it. So I’ve not changed it. We literally just say we don’t know anything other than these principles seem to describe how living systems that sustain themselves work, so let’s see if we can align our human economies with them and what potential might emerge that we currently miss.

Jonathan: But how does this set of principles solve the underlying problem of the finance system striving for unlimited growth on a limited planet? How does it become more than just a nice theory?

John: In terms of how to implement a regenerative economy in the real world, then the first thing that leaps out is that one of the principles is that the regenerative systems manifest themselves first and foremost at a local or regional level. So we start by saying that the right unit of analysis for an economy is place or bioregion scale, and that’s in conflict with the way we’ve organized the economy.

Most people think about corporations and nation-states as the unit of analysis. But if you start by thinking about it in the context of a bio-region or a place, where companies and governments and nonprofits and hospitals and schools are all part of that place-based economy, then you start thinking about economy in an entirely new way. You start to see it as a system, a place-based system.

For years, we’ve been telling the stories of regenerative projects popping up in the real world in our Field Guide.  These are happening organically, in response to the very real pressures we face if only we have fresh eyes to see them. 

And recently we’ve developed a network of regenerative communities who are working to implement regenerative economies in their region.  Just recently, we put out a call and said if this resonates with you let us know and we’d like to work with you to help you make this reality in your place. And we’ve now got seven of what we call hubs around the world – and a pipeline of over 50 additional places form five continents expressing interest in joining the network.  They’re essentially saying “we get it, this is how we want to do this, we want to be part of this”.

Jonathan: So who’s reaching out to you? Who are you working with on this?

John: So for example, one bio-regional hub is Denver-Boulder in Colorado.  Another is in Buffalo New York.  Another is Mexico City. And we’re working on local and nation-level with Costa Rica.  These initiatives are locally lead from the grass roots up, building on the trust that exists in each place.  If you look at them with the principles in mind, you see the principles showing up there, although always expressed uniquely in the local context.  I like to say that every snow flake is unique, but every snowflake looks like a snow flake.

As our science advisor Sally Gorner taught us, the big idea here is that systems only change in response to pressure. If you put water on the stove nothing happens until you turn the heat up, and then it starts to boil. And so, I believe our economic system is responding to the pressure and these more regenerative approaches are emerging naturally, all over the world, first around regenerative agriculture and land management, and now increasingly inseparable from communities themselves. Our Buffalo hub is even focused on the regenerative manufacturing plant of the future!  And this natural emergence is the way living systems take change to scale.

We believe – and we do in fact see – that the regenerative approach is actually bubbling up all over the world. It’s just that no one has language or the principles to see what it is. We believe that by creating this network of place-based, place-driven projects we help the people in those places to manifest what’s natural for that place. It’s really very exciting and we’re starting to see that happening in all the hubs, and in de facto hubs that long pre-existed our network.

Each of these hubs will have a unique expression of the regenerative economy and yet they can each learn from each other because they’re applying similar approaches and principles that can be borrowed and shared from some other hubs. And so that’s what we’re hoping will occur, and what we’re starting to see occur in the network.  Learning to learn together.

Jonathan: So emergence is how all of this happens?

John: Yes, very much so. Emergence is the best way to describe how this happens. But we also see clustering potentials. For example, we thought we were just launching one hub in a region in Costa Rica, but it spread very quickly.  There are 29 territorial regions in the country that are all now being exposed to the approach, so now even a national strategy is a real possibility. Once this takes off in one place, it sort of spreads next door. Which by the way is also a first principle in systems science.

* * *

PART V: THE NEXT STEP

Jonathan: This is all very exciting to learn about. And it’s an interesting take on the whole debate about sustainable business and financial markets. Now, I just have one more question, and it’s a very big one: In your view, how should the world work? What needs to happen?

John: Boy, let me think… There’s sort of an act-with-urgency-on-the-crises-of-the-moment part, and then there’s this longer-term evolutionary change. What I say to people is that if I could have one wish it would be that the world would adopt a meaningful and accelerating carbon tax. Someone has to figure out how to implement a serious carbon tax would that would radically shift our energy system off fossil fuels in a short period of time.  At the same time, we need a massive effort to accelerate regenerative approaches to agriculture to rebuild the natural carbon sinks in the soil.  A well structured and effective carbon tax would accelerate both of these priorities. 

Jonathan: How big tax on carbon are we talking about?

John: I don’t know the exact answer to that. But I was at a sustainability conference and there was this panel of energy executives and they were sort of proudly standing up and saying “we support a carbon tax”. Then I stood up and said that the carbon tax we’re talking about is a tax that’s high enough to essentially make their products un-economic. And they didn’t like that. But that is what we’re talking about really. If the tax doesn’t stop us from burning fossil fuels, then it’s not high enough. It has to be scaled in within what’s physically feasible in a global economy that’s currently addicted to fossil fuels without causing the global economy to collapse. It ought to be as high as possible and accelerate as fast as possible, just short of causing serious economic collapse. The purpose of it is to stop burning fossil fuels.  It’s really a quota disguised as a tax.  And the second purspose is to stimulate natural carbon sequestion on a massive scale in our soils – crop lands and grasslands, and in our forests.

Jonathan: So what you say is fix the urgent issue now with a big carbon tax. And then the regenerative economy on the long term?

John: Yes, exactly. And where I think the regenerative communities’ network comes in is that we know we’re already in some variation of an economic transition – some would say collapse – and so building from the bottom up at a bio-regional scale a healthy economy aligned with the principles of living systems seems to me to be what needs to happen simultaneously with dealing with these much more macro top-down challenges. So you sort of build the resiliency in the future while you’re dealing with the undoing of what’s untenable.

The post Regenerative capitalism is coming: A conversation with former J.P. Morgan Managing Director John Fullerton appeared first on Jonathan Wichmann.

In 2017, Geoffrey Jones, professor in Business History at Harvard Business School, published Profits and Sustainability. In the opening lines, he wrote: “The degradation of the natural environment presents the greatest challenge faced by humanity.”

He has continued to pursue this theme and has just published a follow-up book, Varieties of Green Capitalism: Industries, Nations and Time.

After my first conversation with Geoffrey regarding lessons from business history, I therefore returned to speak with him again. I wanted to capture his perspectives on the future of business and the challenges facing us.

Below is an edited transcript of my conversation with him.

* * *

PART I: THE TWO MAIN CHALLENGES OF OUR TIME

Jonathan: In Profits and Sustainability you write that climate change is the biggest challenge. You point to inequality too. But are we really in such dire trouble? Are things not perfectly ok?

Geoffrey: Well, I haven’t changed my mind since I wrote that book. I think both climate change and inequality remain fundamental challenges. I think the degradation of the natural environment, as I think I wrote it, is the greatest challenge. Simply because if the planet becomes uninhabitable, that’s kind of the end of things. And there is really strong evidence about it. Like melting ice caps and rising water, which indicates that very large cities and some countries will actually sink. So that’s why I continue to think that climate change is the most serious challenge.

But inequality is a huge challenge too. We have a situation where half the world lives in poverty, and that’s now flooding over to the part of the world which lead these privileged safe existences, as you know very well over in Europe, right? Social systems like the Swedish one are under huge pressure from people fleeing these bad conditions. So that is a huge problem. It’s having huge political consequences. The rise of populism, of nationalism, and that sort of thing. 

Jonathan: How did we end up in this situation?

Geoffrey: Well, overall we’ve made the same mistakes in the second wave of globalisation – since the 1980’s – as they did in the first wave of globalisation in the early 20th century. And that is to create a very rich 1% while leaving a lot of people behind. It has major political consequences. In the early 20th century it helped drive fascism and communism, and today the consequence so far has evidently been a resurgence of racism and nationalism. It’s too soon to tell where it’s all going, but the consequences are serious enough already – and it’s spilling out into the same kind of policies we saw back then. 

So yeah, to sum it up, I would continue to say for me that those two are the two huge issues of our time.

Jonathan: Regarding the inequality issue, how do you see the relationship of the rich 1% in the west and the billions of people living in poverty?

Geoffrey: The connection is very clear. The affluence of the West in multiple ways depends on the poverty of many people in the Rest. We’re wearing shirts from Indonesia or Bangladesh made by deeply impoverished people who get very little benefits. And you can say the same about electronics. If you’ve got an iPhone, well, that’s made by semi-forcibly conscripted people working in China. The people who made your iPhone are far from owing one themselves. We all enjoy the benefits of fast global communication, but these people only do slightly better than they would have done if they’d stayed in their villages. They don’t capture any of the real benefits of globalisation.

So the two worlds are interrelated, and all the benefits I think have gone to the West. Was that inevitable? I don’t think so. But to avoid it, it would have required that business actors, in particular, had thought a bit harder about the consequences of their actions. They should have invested more in reducing the number of losers. That would have been to the longterm benefit of the capitalist system. Because with a better income these people would have become better customers. They would be more likely to support the value system, and more likely not to support certain political parties. And less likely to become Islamic militants who seek to harm non-believers, if they get a chance.

So, to think about the consequences would even have been in the long term interest of larger corporations.

* * *

PART II: A SYSTEM-WIDE FAILURE

Jonathan: So, if only corporations had cared for citizens, societies and for the natural environment… It seems very far from what actually happened…. But, to stay positive, what is the solution, you think? 

Geoffrey: It’s all really very difficult because in a way it’s a collective problem. If one company really decides to act in another way, it’s competitors may not, and its shareholders will not like it. The shareholders are institutions like pension funds who have to provide pensions for increasingly aged populations. So they might end up getting less money – in order for firms to be more sustainable. In the end, the cost would fall on retirees who would get less income. It’s a system-wide challenge and failure. 

Jonathan: Based on what we know about corporations and what motivates them, I would also find it a bit naïve to trust them to fix it themselves. Don’t you think we need some sort of regulation or enforcement?

Geoffrey: I’m no enormous fan of the ability of governments to move things on. But regulations can certainly level highly distorted playing fields. Things like a carbon tax, for example, would probably be quite a good way to intervene. And there are many other things like that. There’s a ton of things governments could do to improve the skill levels and the opportunities of poor people. But in fact it’s going in the opposite direction. I think it’s almost system-wide that if you live in an expensive area and can afford an expensive house, then your kids will probably go to a better school and in turn have a better chance of buying an expensive house. And so you have this circular process, and none of that is inevitable or rocket science.

In the United States we have a bizarre education system which is paid for by local property taxes. So, inner city schools struggle, and will continue to struggle, while the rich suburban schools do well and their kids will do well. But that’s simply a political and institutional artifact.

So, if you want to be optimistic, I think the problems are solvable. It’s not like inventing interstellar travel to solve many of the problems. Architects know how to build much more sustainable buildings. Clean energy technologies are already pretty good and getting better. All the problems of inner city schools etc. are not fundamental problems.

So in a sense that’s very optimistic. We know what needs to be done, and it is doable. But then we have this political and cultural log jam, which means that people don’t want to pursue those strategies for all sorts of reasons. Vested interests or whatever. So I think what we need very much is a change of mindset. Which is where journalists and hopefully academics come in. And hopefully talented political leaders who can offer a vision – instead of the alternative.

Jonathan: Yes, but I guess at least knowing the solutions is a good starting point… 

Geoffrey: People in the Middle Ages didn’t know the solution to the black death. Then you’re really stuck.

Jonathan: Then it becomes your fate. The problem today is different. Is it simply human behaviour? That we don’t want let go of our riches and don’t want to pay for the poor? Is it just because we’ve become so obsessed with our own fortune?

Geoffrey: Well, it’s kind of understandable that people in for example Denmark don’t particularly want to give away large resources to people who has fled from Syria and ended up in Denmark. And still, a lot of individuals now give some money away to charities. They look at labels of food. They do all sorts of things which suggest that they have some kind of concern beyond their personal or their family’s income. So I think there is quite a lot of altruism floating around, but it’s not being applied in an effective way. It’s not being captured at the moment.

Also, people who are not altruistic at all are apparently much better at the moment at advancing their ideas, which is to shut out the bad problems rather than address them. Or to deny that the problems exist in the first place, which is what climate deniers do very effectively.

But overall, I’m a bit optimistic about humans. We’re not entirely selfish beings. I think there’s quite a lot of evidence about altruistic behaviour. On all sorts of planes of daily life, people do things that doesn’t naturally serve them as individuals. Like giving instructions to a stranger in a town or anything.

Jonathan: It’s also interesting how this problem connects all the different entities of society – companies, citizens, NGOs, government… 

Geoffrey: Yes, and there’s no way governments are going to have a magic wand to solve these things. I don’t believe. We have a world of politicians who need to get elected and all sorts of stuff going on. So I think co-creation with governments is key. And, I would stress, local governments more than national governments. We need entrepreneurs who can innovate in solution areas, and consumers who can support particular choices or follow particular rules. I think you need to get them all on board. And that always comes back to the thought leader’s story. That you need people articulating what can be done and diffusing that in ways that people can understand and appreciate. That’s where a lot of the log jam is at the moment – and it’s not at all easy to solve.

Jonathan: So it’s a long battle, but we need to speed it up…  And then you read that 40% of the global population don’t know about climate change. It’s a staggering number.

Geoffrey: It’s a staggering number. But when you think of the daily life of most people in Africa and some parts of Asia, in big cities or in the countryside. Today, most people there have some literacy, but their daily life is still the struggle of survival punctuated by endless misfortunes of health. So, it makes sense that climate change is not top of their list.

It’s actually more shocking in a country like the United States where you have a great deal of people who deny climate change. Who believe dinosaurs didn’t exist. It’s more shocking that some of our education systems teach evolution and creationism as equal theories. That is shocking.

I’m less shocked that the deeply impoverished people in Asia and Africa don’t have much time to think about it. Although that may be underestimating things. In some ways, they are at the forefront at the consequences of climate change, and I wouldn’t be surprised if going forward some of the strongest advocates of the need to act will be from regions and countries outside the western world. 

* * *

PART III: BUSINESSES ARE NOT WICKED, BUT…

Jonathan: What role do businesses play in all of this? How important are they in terms of these problems of climate change and inequality?

Geoffrey:  They play a crucial role. Businesses reinforce trends and promote winners. The regions that are already in good shape tend to do well in a globalised business environment. And people with a lot of skills also do very well in this environment. So, in that sense, businesses tend to increase inequality.

I’m not saying that businesses are wicked, but they reinforce trends. The decisions behind these reinforcements are quite rational. For example, if you’re going to set up a research lab, you’re not going to set it up in Congo. You’re going to set it up somewhere with a strong research tradition and universities.

As for businesses and the environment, then one of lessons is that it’s going to cost more if you’re going to do things in a way that doesn’t destroy the environment. The idea about a win-win is a myth. Conventional business has no regard for its environmental impact – whether it’s climate issues, destroying species or anything else. 

So I think a big challenge moving ahead about is redefining business so it can have a more productive impact on the world. And by productive, I do not just mean generating income. The whole system depends on generating some income for shareholders, so not getting rid of that, but figuring out how businesses can productively contribute to societal welfare, including environmental welfare.

It’s not a new idea at all. It’s been the ambition of businesses, business leaders, over a very long period. It’s interesting, if you look at the history of management education then it’s more or less what Harvard Business School was teaching future managers from the 1920s maybe until the 1970s. You can see it on record, that one Dean after the other was talking about that back then. And now we have a Dean who’s talking about it again.

However, it’s never been fully achievable across the system. Some individual businesses have done a much better job than others. The problem is how to move a system so that the new conventional business is one that provides wealth, continue to innovate and yet shares the benefits of that with a wider group of people. And with the natural environment.

I think that’s the challenge going forward. I think that will require changes to the concept of fiduciary duty, for example. I think it probably will require capital to act in different ways. The holders of capital need to accept that kind of mission.

* * *

PART IV: SUSTAINABILITY IS DEAD, LONG LIVE GREENWASHING

Jonathan: What we’re talking about here, I guess, is the need for sustainable business, and a sustainable business mindset where you think beyond the bottom line and short-term profits. It’s about sustainability, isn’t it?

Geoffrey: Well… one thing that has in fact changed in the last 30 years has been a globalisation of the sustainability rhetoric. And I think it’s quite unfortunate because a lot of the rhetoric is fairly meaningless. I mean, today every company in the world is apparently sustainable. There has been a spread of this rhetoric. It used to be that different countries had different narratives. Now there’s a single global narrative, and all to rarely is it based on reality. 

Jonathan: I also think the level of greenwashing has increased the past few years. For example, most of the old oil companies, no matter how big their portfolio of renewables is at the moment, are becoming “energy companies who are building a sustainable future” or similar. But I guess it happens across all areas of business.

Geoffrey: I think the whole area of sustainability has arguably become an obstacle to environmental protection. Because it’s become a mixture of vague metrics, a spread of a rhetoric and a failure to invest in any kind of system-wide solution. So as a consumer today you’re unaware of the environmental impact of a product. Every company is green. Every brand is green. Things are even painted green…

Jonathan: Is it just the case that profit-thinking is not sustainable? Or can you in fact merge the two, profits and sustainability?

Geoffrey: I think you can. But I think it comes down to how you define profits, and how you define sustainability as well. So, I think if you developed accounting methods to fully incorporate external costs into balance sheets, then you could still have a profit-driven business. But negative environmental externalities would have to be included in how you measure profits. So, that’s what I would favour. I think we have a problem with our present accounting systems. If we change those we may be able to continue. We would be able to get the good side of profits which is for example material incentives for innovation and all the rest of it – without some of the consequences. But sustainability is so vague now that it’s practically a meaningless term.

So, I do think profits and sustainability can be reconciled. But we need to go back to the definitions and to the kind of measures that are used. I don’t think that a very narrow shareholder value type profit and fiduciary responsibility to maximise your profits can be reconciled with any kind of sustainability.

This also has to do with the huge problem we have with metrics, how we measure these things. I was at an event recently where someone noted: “We have no metric to measure the extinction of a species”. We know that we are in the sixth period of mass extinction – species are dying or disappearing at an alarming rate – but as the CEO of a company you have no idea if what you’re doing is contributing to that. 

* * *

PART V: DOING BUSINESS IN A HOSTILE WORLD

Jonathan: So if that’s the context in the 21st century – climate change and inequality, in particular – what then do you imagine will be the key challenges for business in the future? How can they thrive or even survive in this environment?

Geoffrey: Compared to twenty years ago, I think businesses will find a much more politicised environment when they go to foreign countries. And even within their own country. There’s been a huge diminishment of trust in businesses and a huge rise in hostility to foreign businesses. And that’s across systems, from U.S. to China to practically everywhere else.

So navigating governments and political hostility I think are among the biggest challenges faced by firms. At the high point of globalisation in the 80’s and 90’s that was hardly there. Everybody was taking away restrictions on foreign companies. People were competing to attract businesses. And there was this ideological view, even in countries with strong socialist traditions, that business was the engine of growth and solutions. All of that has really dramatically gone away.

Navigating that whole environment is and will be very difficult for firms. I mean what firms do is they do business. They create products and services, they manage a large workforce, they do logistics. That’s what they do. So having to navigate a political context like that takes up a bunch of firms out of their comfort zones or even their capabilities. So, if you have a business which has a global value chain… well, best of luck! There are restrictions, regulations, political pressures coming on you all over the place. You could end up on a U.S. President’s Twitter account for daring to source something in Mexico rather than in the U.S. For most firms, even the big ones, that is a very uncomfortable environment. Is it a temporary blip? I don’t think so. I think all the trends are that this is accelerating, in part because of all these structural problems in the world economy of inequality and the reaction to that.

So that’s going to be with companies for a long time, and they have to think it through very carefully in terms of how to build their societal legitimacy within that context. And that has to do with a lot more than fake CSR campaigns. Or sustainability reports which don’t say very much.

Jonathan: Yes, I guess it’s pretty easy to do your own report… 

Geoffrey:  I think so. It just doesn’t mean anything. And worse still, most people know it doesn’t mean anything. That’s a bit of a shame, and that’s different as well. When the first sustainability reports came out 10-15 years ago companies were highlighted for doing that. It was a plus, and they would get customer approval. Today, everyone’s doing those reports and people do not have much faith in it.

So, I predict a difficult time, particularly for globalised companies.

The post Redefining the role of business: A conversation with Harvard Business School’s Geoffrey Jones appeared first on Jonathan Wichmann.

My most loyal readers will know that this is the question I’m currently trying to answer, as part of my project to describe the future of business.

First, I spoke to Chris McKenna of Oxford University’s Saïd Business School. Since my last post I’ve also spoken to Nitin Nohria, the Dean at Harvard Business School, and Geoffrey G. Jones, Professor of Business History at Harvard Business School.

The two HBS scholars added a number of lessons to the ones carved out by McKenna. And, interestingly, they both reinforced Mckenna’s argument that change is not accelerating.

The idea that change is accelerating is not new, but they were actually more right to think so in the 19th century, says Geoffrey G. Jones:

“Before the telegraph, information travelled at the speed of a horse. That’s the biggest transformation one could imagine in the world of information. And the web hasn’t done that.”

Driven by basic emotions
So, instead of hyperventilating over the idea of accelerating change and the next big thing that’s going change everything, businesses ought to study business history. Because things are changing, yes, but rather than acceleration we see certain repeating patterns.

Why is that? According to Mr. Jones it’s fairly simple: ”Businesses are driven by human beings whose nature hasn’t changed much at all. We’re motivated by some very basic emotions. Greed, fear and so on. And these basic emotions drive the same sort of patterns.”

He continues: “If, for example, we look at financial services, we know that there will be asset bubbles, and that they will burst. We also know that there will be speculators and crooks. We’ve always had that, from Charles Ponzi to Bernie Madoff.”

Is history lost on business?
Nevertheless, history seems to be lost on businesses. The Financial Crisis made that abundantly clear. With a better understanding of history, people would have known not to play around with financial instruments.

This lack of historical awareness in business is not only unfortunate, it’s also a bit odd: In many other parts of society we see a much greater appreciation for how useful history can be.

One example is the military. As part of your officer training you will more or less go through all the battles of the past. Even though everything in the military is new, knowledge of history is important because there’s an understanding that you take better decisions if you have an understanding of the patterns – rather than pretending everything is new.

Contextual intelligence
The lessons from business history are many. In fact, you could argue that there are too many.

So, it’s not about knowing business history inside-out and referencing history whenever you can. The idea is more to study business history in order to develop a better overall understanding of business.

This is what Nitin Nohria and Anthony J. Mayo referred to as having “contextual intelligence” in their book In Their Time: The Greatest Business Leaders of the Twentieth Century (2005).

Nohria explains: “Everybody talks about business intelligence and emotional intelligence. The argument that we made was that you also have to have contextual intelligence. Which means you have to have an appreciation for how your context is different from the past, and how it continues to change. In what ways is it similar? In what ways is it different?“

“Appreciation of history is very good at building contextual intelligence; and having contextual intelligence is a very useful thing for a leader.”

Three kinds of leaders
In the research for their book, Mayo and Nohria also saw a specific pattern when it comes to leaders. They learned that business is a constant interplay of three kinds of leaders:

The entrepreneurs. People who create new things. A classic example is Henry Ford who built the assembly line and then the Model T.

The managers. People who add structure to ideas and allow the ideas to develop their full scale and scope. If Henry Ford was the entrepreneur, then GM’s Alfred P. Sloan (pictured above) was the manager. He showed that you could build a company like GM – of even larger scale and scope than Ford – by focusing on the idea that each and every customer segment needs a different kind of product. Not everybody needs a Model T.

The leaders. In Nohria and Mayo’s terminology the word “leader” was reserved for this category. A leader is someone who comes in when a company is losing its energy and needs to change. And who is then able to transform this company. In some ways it’s what Jack Welch did at GE (and what Jeff Immelt failed to do), and it’s what Mary Barra is now trying to do at GM.

So what are the lessons from this? Well, first of all that all companies will move through different phases (in cycles of many decades). And secondly, that in the majority of cases you will need very different kinds of leaders in the different phases.

For example, only very rarely will a great entrepreneur turn out to also be a great manager. Someone like Amazon’s Jeff Bezos is an exception. (And the question is if he will – when the time comes – be a great leader too. It’s not very likely.)

Balancing management and leadership
While these are the three archetypes among business leaders, the disciplines of management and leadership will of course need to co-exist in a company. And according to Nohria, another important lesson from business history is that you need to balance management and leadership:

“Organizations can be overmanaged and underled. But they can also be undermanaged and overled. It’s a repeated lesson in history that you need to balance the disciplines. You see examples throughout history of organizations that have failed because they were overled. And of organizations that failed because they were overmanaged.”

Today, the overmanaged companies arguably still by far outnumber the overled companies. Which is why “bureaucracy” is often made the scapegoat. But we need to be critical when people then say things like “we must stop managing and start leading”.

As said, the key is to balance the two disciplines. This requires that we keep in mind just how important the management discipline is for any business. Raffaella Sadun’s paper in Harvard Business Review entitled “Why Do We Undervalue Competent Management?” helps us do just that.

Sadun’s paper is based upon work done across countries and across sectors, and it shows that 1) basic management practices is still a massive challenge for many, many organizations; and that 2) good management correlates with strong performance.

Therefore, as Sadun concludes, it’s simply unwise to teach leaders that strategy and basic management are unrelated.

In a way, this is good news. There’s still so much room for improvement.

* * *

Looking ahead, what are the main challenges facing businesses and societies? The answer to that question should give us a better idea of the future of business.

And so, that’s the question I will try to answer in my next blog post.

The post Here’s why we need to balance management and leadership. And appreciate business history more. appeared first on Jonathan Wichmann.

My answers have in no small part been informed by a conversation I had with business historian Chris McKenna of Saïd Business School at Oxford University.

Now it’s time for the last one, and it’s a bit technical.

Two kinds of integration

Most business students will be familiar with the terms “horizontal integration” and “vertical integration”. Here are the Wikipedia definitions:

Horizontal integration is the process of a company increasing production of goods or services at the same part of the supply chain. A company may do this via internal expansion, acquisition or merger. The process can lead to monopoly if a company captures the vast majority of the market for that product or service.

Vertical integration (in microeconomics and management) is an arrangement in which the supply chain of a company is owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.

So, in short, horizontal is your competitors in the market, whereas vertical is your suppliers. But what’s interesting here is not the definitions. It’s the relationship between the two.

Horizontal first, then vertical

According to Mr. McKenna there’s an important lesson here if you look through history: that you need to do horizontal integration first, then vertical. Always in that order.

A quirky way to illustrate it would be something like this…

In other words, you need to start by trying to grow your marketshare, e.g. by buying up your competitors. But eventually, as power relations arise in the chain, focus must shift to vertical integration. Because more than anything you compete within the chain, not across it.

That’s what most people don’t realise. “We all tend to think that when you’re Coke, you’re competing with Pepsi,” Chris McKenna explains. “But actually, when you’re Coke, you’re competing with the bottlers and you’re competing with the people making sugar. Because those are your costs.”

Historically, companies are happy when suppliers are fragmented and cheap. When suppliers have no scale.

On the other hand, companies are upset when suppliers have power, in which case suppliers are likely to have a big margin. Often, the company will then want to buy that margin.

So the real story of competition is the story of horizontal integration first, vertical integration second. Because your compete within the chain, not across it. 

There are many, many examples of vertical integration. A classic example is the oil majors. Often they – e.g. ExxonMobil, Royal Dutch Shell, ConocoPhillips or BP – control the entire supply chain, right from the oil rig to the retail gas stations.

Don’t get obsessed about your competitors

So where does it leave us? Well, it tells us a great deal about what the focus in a business should be. You shouldn’t get obsessed about your competitors in the market, and try to monitor and react to their each and every move.

Instead, you need to focus on your customers needs. And, not least, focus on building your own system in the most optimal way.

Again, away with the short-term focus which is also horisontal in a sense. And in with the long-term focus which is vertically oriented towards building the most optimal system to fulfil customers needs. 

* * *

As with my previous posts, I would like to thank Chris McKenna for inspiration and input.

The post Horizontal first, vertical second appeared first on Jonathan Wichmann.

But do companies need to be companies?

As odd as this question might sound, there’s actually a great deal of thought behind it. And the answer is… No.

According to Chris McKenna of Oxford University’s Saïd Business School, who I spoke to a few weeks back, we take for granted that businesses are driving economic progress and innovation in our societies.

But it’s not the case. It’s not that simple. We would be wise to broaden our perspective and not always focus on business.

The state matters

First of all, it’s clear that the state matters. Both 9/11 and later The Financial Crisis (2007-08) reminded us that the state has a meaningful role to play. Regulation, oversight and security remain important. 

Furthermore, the jury still out on whether or not the private sector is in fact more innovative than the public sector.

Some argue that state bureaucracy is a myth. Others are reminding us how bureaucratic and ineffective large companies are.

Nonprofits are growing

That we need to lessen our focus on business is even clearer when we consider the nonprofits.

Today, the nonprofit sector is where much of the growth in people is happening. And nonprofits are powerful.

Let’s consider U.S. education and hospitals for a moment. One idea that you hear fairly often is that they are inefficient and that we should bring for-profit business models to bear on them. That would hardly be a good idea. 

“What’s really powerful in nonprofits is that they don’t and do not try to create profits,” Mr. McKenna said. “Instead, they can invest for long periods of time. They can motivate highly intellectual, interesting people to work for them at reduced rates. And they can motivate people to invest in them, to literally to give them money.”

What if Goldman Sachs could ask people to give it billions for free? It sounds absurd. But if you consider the likes of Harvard and Stanford, it is actually what is happening. People donate billions to them each year.

A parrot with a purpose

One of the ironies at play is the idea of “the social enterprise” and having a higher “purpose” for businesses. From a helicopter’s perspective it’s puzzling. It’s a mixed system in which you’re running a for-profit company with a higher mission. In essence, businesses are parroting nonprofits.

If the higher mission is really so important for your business, why would you want to gain a profit for shareholders and owners? Why not become a nonprofit, reinvest in your business and your mission, get highly skilled people to work at reduced rates, avoid income taxes, and receive donations?

In essence, businesses are parroting nonprofits.

Nonprofit as a competitive advantage

A good example of how a nonprofit can be highly competitive is German global engineering and electronics company Bosch. The company is running for a foundation, the Robert Bosch Stiftung. 

Nevertheless, their competitors in the automotive industry will say that Bosch is absolutely brutal to go up against in the market.

Bosch is not an isolated example. People in industries who go up against nonprofits say it’s not fair. That it would be much easier to go up against a for-profit company as it’s impossible for to compete against a nonprofit. They even want regulators to intercede and force the companies to need profits.

Yes, yet another irony at play.

Who’s innovative now?

A nonprofit can be more than a brutal competitor in the market. If we focus on the innovation aspect of things, nonprofits are in many ways more innovative, doing more ground-breaking things than for-profits.

And they seem destined to continue to do so.

The 2nd Industrial Revolution created vast pools of money around large corporations. Sooner or later, these pools of money were given over to nonprofits, creating e.g. the Ford Foundation and the Carnegie Foundation.

The same has happened after the 3rd Industrial Revolution. Today, all the fuss about Microsoft and Bill Gates is long gone. Still, the largest foundation in the world is the Bill & Melinda Gates Foundation with a yearly endowment of more than $40 billion.

In other words: History has taught us that sooner or later the money will go into nonprofits. Here, that money is going to fuel growth in all kinds of areas. 

Let’s take the Gates Foundation as an example. In their strive to end extreme poverty and poor health in developing countries, they are creating compostable toilets (pictured above), finding new photovoltaic uses, discovering new ways to distribute pharmaceuticals and much more.

When you deal with the really tough issues, innovation becomes more crucial than ever.

Who’s next in line?

We need to remember this. Business isn’t everything. The nonprofit sector is growing, and in many ways the nonprofit model is a better and more competitive model than the for-profit. 

Also, sooner or later much of profit generated in a business will go into nonprofits anyway, and here some of the most innovate things are happening in order to solve real problems.

There’s a historic precedent for all of this, and the future for nonprofits look promising. 

Next in line after Microsoft are the likes of Apple, Amazon, Google and Facebook.

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As with my previous posts, I would like to thank business historian Chris McKenna of Oxford University’s Saïd Business School for inspiration and input.

The post Business isn’t everything appeared first on Jonathan Wichmann.

Timeframes are supposedly getting shorter. And so is business strategy. It’s not 10 or 20 years strategies. It’s not even three years. It’s the next quarter.

This short-termism is fuelled by stock market dynamics and the constant need to please the market. But it’s also tied to the Internet and our hyperconnected world. 

No matter what the reason is, the assumption is wrong, Chris McKenna of Oxford University’s Saïd Business School assured me in my recent interview with him.

Time is not speeding up. Things are not changing more and more.

Amazon, the boring company that won

With regards to business strategy this is also true. “You need to play the long game,” Mr. McKenna told me. 

The Internet might be to blame for our fetishizing of the the second derivative, but if we look at who has in fact won the Internet, then the irony is clear.

Because it’s not a fast player. It’s the complete opposite: a long player. Yes, I’m talking about Amazon.

Sure, they did start early, and they did get early funding too. But after that, they played the long game. Jeff Bezos (pictured above) and his team kept reinvesting in their business to build a system that would impress their customers and make them return again and again.

What Amazon was really doing most of us only understood partially. In fact, we didn’t really pay attention. They weren’t just about selling books, CDs and DVDs online. They were going to sell almost everything online.

This long-term focus has even enabled them to survive two major economic downturns, proving just how right Harvard’s Michael Porter was when he said that sound long-term strategy is key, particularly in a crisis.

Also, what Amazon became really good at was their logistics. They excelled in what’s arguably the most boring business activity (next to accounting) and a part of business life that other startups with big funding and high burn rates hated from day one.

(Quite neatly, this ties back to a point from an earlier post: That the boring companies will win.)

(Quick excursion: It’s clearly not a coincidence that Elon Musk has founded The Boring Company. Which by the way is also funny because it’s just one letter away from The Boeing Company.)

(Quick excursion 2: It is a coincidence that I wrote Leth and boredom (2007), a book about how boredom can be an enabler of creativity.)

Play the long game

So that is yet another lesson from business history. If you want to win you need to play the long game. Do experiment, but never loose sight of the end goal.

Needless to say, the need to think long-term is also part of the larger sustainability agenda. But what’s interesting here is that even from a strict singular bottom line focus long-term is the right way to go about it.

You need to play the long game.

The post Play the long game appeared first on Jonathan Wichmann.

But how do you go about building a system? Is there a particular approach which has proven to be more successful than others?

According to Chris McKenna of Oxford University’s Saïd Business School, who I interviewed a couple of weeks ago, that is certainly the case.

“So many of the really extraordinary systems that are built, they are built to local needs. They are built to needs that look nothing like anybody else’s need.”

In other words: You should build a system based on your own market and situation. Then maybe, hopefully, it will turn out be useful in another market, another country.

Lean from lack of space

The story of Toyota’s lean manufacturing is a classic example of this.

In the US, where there’s of course plenty of physical space, you could do what Ford did. He could build giant factories and fill them up with parts and people. 

But in Japan, where you are constrained by the size of the facilities, even the size of the vehicles, you have to build an entirely different system. Because you don’t have the space for spareparts, racks, inventory etc.

That’s how Toyota’s system of lean manufacturing came about. A system where all waste is reduced and focus has shifted from production output to customer demand. This whole philosophy is closely linked with the physicality and culture of Japan.

The lesson is that you need to build to your local need. If you get it right, and other markets can benefit from your system too, you will have a big competitive advantage. Because no one else ever built to that need.

A story of cheap furniture

In Sweden, after World War II, a very specific sociological situation took form. Families were growing rapidly, and young people started moving in together before marriage.

Back then, normally, you would inherit your parents or grandparents furniture when you got married. That was no longer possible, and the need for cheap, temporary furniture arose. And in came… IKEA.

Soon after, young families didn’t even want their parents furniture because it was out of fashion. The mentality around furniture had changed too. You no longer bought your furniture for life. You only bought it for a couple of years.

Now, imagine a world in which young couples live together without getting married. In which they want their furniture only to last for a couple of years. And in which they want their furniture to not look like their parents furniture… Oh, wait, that’s now.

Who knew that the whole world would turn into Sweden?

Not necessarily a good story

The lesson is that IKEA solved a local problem. A problem that was very odd and very specific, and then the whole world eventually got the very same local problem.

In essence, that’s the story of the world’s largest furniture store. And let me be clear that it’s not necessarily a good story.

IKEA made furniture disposable. Furniture used to be something you had your entire life, and now furniture is something you throw away.

Today, IKEA claim to be a green company. It’s far from the truth, and it seems that no one sees it or wants to talk about it. Maybe the company doesn’t even realise it.

Long story short: You can be as eco as you want, but once you throw something away it’s no longer eco. The same could be said about fast fashion and the likes of H&M, Zara, Gap, Uniqlo etc.

Next episode

On that note, what else can we learn from business history regarding what mindset, worldview and values are required to do business in the 21st century?

I will try to answer that question in my next post.

The post Build to local needs appeared first on Jonathan Wichmann.

But what is the right business strategy if you want to win the market?

The short answer: You need to be a system builder.

Systems matter

History has shown us that systems matter, Chris McKenna of Oxford University’s Saïd Business School told me in a recent interview.

Henry Ford is the most famous example of a “system builder”. The key to his success was his integrated approach to his supply chain. Instead of buying from suppliers, Ford took control of his supply chain by producing his own parts. This enabled him to standardise, lower the costs and improve performance.

In turn, his Model T became affordable and he could take it to the masses.

“If you want it done right, do it yourself,” he later explained in his book Today and Tomorrow (1926).

That said, to do everything yourself is not always the best strategy. It comes with enormous risks. What if your vision of the future turns out to be wrong?

Another approach is to build a win-win supply system where the company and its suppliers have a vested interest in helping each other succeed. McDonald’s supply chain system is the perfect example of this.

But no matter what kind of approach you choose (“do it yourself” or “strong partnerships”) it’s clear that systems matter.

Imagine a future…

Today, a classic system builder is someone like Elon Musk.

Like Ford did with the Model T, Elon Musk and Tesla Motors are looking to bring their electric car to the masses. And in a move also similar to Ford, Tesla are integrating vertically by building “gigafactories” to produce the batteries themselves.

However, Musk is not only building a production system.

More than anything, he is imagining a future where people’s own ‘systems’ will change dramatically: Before long we will have affordable self-driving electric cars that are charged by affordable batteries in our affordable solar powered smart homes.

If anyone is looking to build those systems for us, it would be Elon Musk.

Next up

If building a system is key for businesses, then the next question is: “How do you go about building a system? Is there a winning formula for this?”

I will try to answer that question in my next post.

* * *

As with my previous posts, I would like to thank business historian Chris McKenna of Oxford University’s Saïd Business School for inspiration and input to this blog post.

The post Be a system builder appeared first on Jonathan Wichmann.