Improving American capitalism

By Stephen B. Young The Daily Record Newswire One of the big issues in our national politics right now is disenchantment with capitalism. Notice how Mitt Romney was politically wounded -- even among free market conservatives -- for his leadership of the private equity firm Bain Capital and, it is argued by none other than Newt Gingrich, his becoming a millionaire many times over on the backs of those less economically fortunate. Occupy Wall Street protesters don't like our form of capitalism. Tea Party advocates don't like the cronyism of big business, Wall Street and the federal government -- both Congress and regulators like the Federal Reserve. David Stockman, former budget director for President Ronald Reagan, is coming out with a book accusing our country of succumbing to "Crony Capitalism" and pointing out President Barack Obama's use of three men who made a lot of money on Wall Street as his chiefs of staff. Can we do anything to restore private enterprise to higher esteem? Actually, we can do many things, but one step is easy and is under way in the Minnesota Legislature. Sens. John Marty and Chris Gerlach and Rep. Linda Runbeck have introduced legislation to permit the formation of "public benefit corporations." These would be new companies that seek to benefit social, cultural, environmental, educational and other community goods by using private capital and private enterprise. They would be authorized to seek lower profits for owners in order to also seek public benefits. California has just authorized such businesses as "flexible purpose" corporations. Seven other states, including New York, have authorized the formation of "benefit" corporations. After the meltdown of global credit markets in the fall of 2008; the bailouts of major financial corporations with public money; and the injection of some $14 trillion into financial markets by governments around the world, it has become fact that publicly traded corporations do not always act as "invisible hands" promoting sustained economic growth in which all can benefit, as Adam Smith famously predicted free markets would achieve. At the same time, not-for-profit corporations, formed to serve community needs and not the financial goals of private owners, cannot robustly use markets to meet certain consumer demands. Nonprofit corporations may not become businesses, though they may undertake a limited range of commercial activities; and they cannot raise equity capital with which to run a business. In recent years, responding to the Corporate Social Responsibility movement, a mixed form of corporation has been proposed -- social entrepreneurs. This approach to providing for community needs tries to marry the for-profit incentives of the business corporation with the charitable objectives of the nonprofits. Examples are micro-credit companies; products for the "bottom billion" of the world's poor (as Unilever has done in India with small packages for its products); and subsidized housing corporations that try to provide a private good (housing) in a charitable form for the poor. Co-operatives are another example of an organizational form that blends for-profit market participation with a wider range of social considerations expressed through membership preferences. Such new corporations would seek investment capital and would be run as businesses but would not be under an obligation to maximize short-term income for the benefit of those who trade their securities. Such new corporations would be more like closely held or family-run businesses that can avoid pressures from financial markets in order to focus more intently on customer quality, employee loyalty and long-term value appreciation for future generations. Such new corporations would seek to serve the community while providing substantial, if more modest, returns to their investors. The law incorporating such companies would authorize their boards to balance the economic returns paid to shareholders with the need to serve other stakeholders (customers, employees, the community) and society at large. Short-term profit maximization would not be the sole objective of these community corporations. If such a board would lean too far in favor of other stakeholders, the owners could replace it so that their ownership interests would not be exploited on behalf of those who had put no money at risk. Such social entrepreneurs could run general-circulation newspapers without shrinking their ability to provide general information and commentary in the interest of high returns. They could run sports teams, as is done by the Green Bay Packers, which, in effect, is a community corporation. Other quasi-private, quasi-public goods such as education, housing, museums and the arts, counseling, health care, child care, etc., could be provided by social entrepreneurs who would profit modestly from providing what society wants. Their business would be to sell for-profit goods and services that meet community needs. In the provision of social and health services, governments could consider switching from the use of public agencies to vouchers and subsidies given directly to those in need who would then turn to market providers for goods and services. Such corporations would provide investment vehicles for foundations, endowments and wealthy citizens seeking to respond to social and cultural needs. In this way, such new community corporations would provide foundations with a second way to serve society: In addition to providing grants from their revenue side, they could capitalize for-profit businesses on their asset side. Hundreds of millions of dollars is available in Minnesota foundations for such investments, assuming that they would earn an adequate low-risk return higher than U.S. Treasurys, certificates of deposit and money market funds of equivalent risk -- thus protecting the value of the endowment corpus. The promise of free markets, going back to Adam Smith, is that they release innovation and new initiatives, that they meet the immediate and practical needs of people very precisely and efficiently, that they pull savings out of society and apply such financial power to satisfaction of the needs of others, causing economic growth to happen as a by-product. If free markets and their incentives and discipline can be linked to a range of community goods, we will have improved capitalism by broadening its capacity to serve society. The limitation of corporations to only for-profits and not-for-profits is arbitrary and of our own making. Entrepreneurs innovate and seek profits in the space provided for them by law. The idea for a new form of corporation to seek both profits and social good is timely and sensible. Published: Thu, Mar 22, 2012