Is capitalism dysfunctional? This former McKinsey boss says so

Capitalism has become dysfunctional and is facing an existential crisis, but integrated thinking – as opposed to just integrated reporting – could not only help make capitalism sustainable, but also manage climate and social risk, says International Integrated Reporting Council chair Dominic Barton.

The Hong Kong-based global managing partner emeritus of McKinsey & Company, and chair of the International Integrated Reporting Council, shared his ideas to reform capitalism for the 21st century at a roundtable hosted by Chartered Accountants Australia and New Zealand in Sydney on 31 July 2019.

He argues that the capitalist system has lost its way over the past four decades. It is beset with short-termism, worrying levels of rising social inequality, evaporating trust in institutions and business and political leaders unable and unwilling to make bold decisions on desperately needed reform.

Given the dangers of climate change and the accelerating pace of technological disruption, he says the need for a new approach is urgent.

“These problems don’t need to go to their end point to create chaos, they are close enough to be urgent so we better get moving,” Barton says. “I don’t think we have 10 to 20 years to figure this out. It’s more of a 10-year horizon, and there has to be some jolts to the system.”

“I don’t think we have 10 to 20 years to figure this out. It’s more of a 10-year horizon, and there has to be some jolts to the system.”

He points out that over the past four decades, capitalism has become less inclusive and less “owner like” as the proportion of privately held companies has increased, locking ordinary people out of the opportunity of participating.

This has created a crisis of trust in business. In Australia, only 15% of people believe the system is working for them, while only 42% trust their government – according to a 2018 GFK Adimarket survey.

The same study found that in 2017, more than 50% of global executives were evaluated on current quarter or yearly performance, even though most said they wanted longer evaluation periods.

Not only integrated reporting, but integrated thinking

Picture: Dominic Barton.

‘Integrated reporting’ is a new way of evaluating corporate performance. It goes beyond traditional financial metrics to include factors such as corporate social responsibility and the organisation’s impact on the environment.

But more important than integrated reporting, says Barton, is “integrated thinking”. That needs to become an intrinsic part of the strategic processes of business leaders and government if capitalism is to get back on track.

“The key thing is in thinking about a broader set of types of capital, or assets which drive value,” he explains.

“It’s thinking more holistically about all the different resources, and how these are combining, and what impact policies are having on those capitals in the short and near term. Integrated thinking is more about recognising that we are in a holistic system, and also recognising that there is a long-term cost to be paid from continuing on the way we have been.”

Impact investors are a force for change

Despite his concern, Barton remains optimistic about the future and sees some “lighthouse” examples of change globally, notably in Scandinavia. However he also saw evidence of progress on his recent trip to Australia and New Zealand, with companies such as Moana New Zealand, the largest Māori-owned fisheries company in New Zealand.

Barton notes that ‘impact investors’ – both institutional and retail shareholders – are powerful agents for change, as are a new wave of business leaders and highly engaged employees.

Human capital, he says, has been underestimated in the past but is now growing in momentum as a force for change.

“But let’s not wait for the standards to come in just so we comply, let’s get going on the thinking,” says Barton.

“Change is occurring. A lot of what we are seeing now wasn’t being talked about as recently as 2010, so there is momentum but we have a short time frame and right now it’s time to be bold.”

NOTE: This article is based on comments made at a roundtable event hosted by Chartered Accountants Australia and New Zealand in Sydney on 31 July 2019, which was prior to his appointment as Ambassador of Canada to China.

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