Readers, consider your bank, where you keep your money. Whom does it serve? (a) You, the depositor? Or (b) its shareholders?
If you chose (b), you get an A. Here is the evidence.
As the US Federal Reserve aggressively hikes interest rates, central banks worldwide follow suit, including the Bank of Israel. Israeli banks moved rapidly to hike the interest they charge for loans and mortgages.
In third quarter 2022 alone, the three leading Israeli banks – Leumi, Poalim, First International – made NIS 7 billion ($2 billion) in profits, up 40% from the same period last year. They paid out dividends of nearly NIS 1 billion to shareholders.
What about us depositors? Did we see a big hike in the interest we are paid on our deposits? After all, the money banks lend is ours.
As they say in Brooklyn, fuggedaboudit. Forget about it. By hiking the gap between what banks pay us for our money and what they charge to lend it, they made a quick additional profit of NIS 2 billion.
Who pays the piper? We do. Nearly half of mortgage loans taken out recently had monthly repayments of 30% of the household’s monthly income. Those with mortgages find rising payments take big bites out of their monthly budget; those who thought about buying a home are priced out of the market.
Israeli banks are not alone. In the second quarter of this year, corporate profits in the United States rose 6.2%, to a fresh record high of $2.53 trillion. They have profited from inflation.
Whom do corporations serve? Not us customers. Because if soaring inflation were indeed driven by higher costs, as businesses claim, profits would fall, not rise to record levels.
Corporations serve their shareholders. Those who run them want to make as much money as they can. And they do.
And what is worse, this greedy capitalist behavior is mandated by law!
Israel’s 1999 Companies Act, Article D, Section 11 (a) states that the purpose of a company is to make money. Period. Not to serve the people. Here is the exact wording of Section 11 (my translation):
“…the purpose of a company is to operate according to business principles, to maximize its profits; given this, it may take into account, among others, its creditors, workers and the public.”
Note: May take us buyers and workers into account! Greedy capitalism is anchored in law. By law, it is optional to run your business for the good of all.
The prophet of greedy capitalism, Prof. Milton Friedman, once insisted that companies must not give money to social causes. It’s not theirs to give, he said. The money belongs to the shareholders. All of it. Even though those profits are driven by the sweat of their workers, the loyalty of their customers, and the law and order of the nation in which they function.
As Harvard professor Bill George, former CEO of Medtronics, wrote, “I am very worried about how capitalism has gone off the rails in the last quarter century and earned itself a very bad reputation, well justified.”
“I am very worried about how capitalism has gone off the rails in the last quarter century and earned itself a very bad reputation, well justified.”
Bill George
Prof. George is not alone. The result of greedy capitalism has been to create massive inequality in wealth and income – “the plague of the 21st C,” according to Zvi Stepak, co-founder of Meitav, a leading investment house that manages NIS 215 billion worth of assets. (See The Report, Sept. 5). The desperation of the poor, he wrote in a recent book, is creating an increasingly unstable world.
What can be done? Let’s begin by amending the law. But how?
Stepak and a blue-ribbon group of experts are actively promoting the change in Section 11 to reflect a more compassionate capitalism, in an age when the modern corporation can no longer thrive by trampling others. I spoke with him about this project.
Stepak: “The idea to promote a proposed law, regarding the ultimate purpose of a company (Section 11 of the Companies Act), was born out of the understanding that if we want to instill a worldview of conscious capitalism in the business world, then beyond what we do today through lectures, articles, courses, etc., a revision in the law can accelerate the process faster and more powerfully, since laws create reality.
“Majority shareholders, board members, CEOs and senior management today see their sole role as making as much profit as possible, as fast as possible. This is what motivates their actions, and this is the foundation of the current Companies Act. The existing Section 11 reflects a concept in force since the 1950s and ‘60s – Milton Friedman and others, dating from Thatcherism.”
Let Section 11 state that the purpose of a company is to serve all its stakeholders – consumers, workers, community, nation – as well as its shareholders. Maximize the value it creates, not solely the profit. There is a difference.
So, whom should businesses serve? Here is a morally sound, time-proven answer. Consider Thomas McCabe, one of America’s greatest business leaders.
In 1916, McCabe joined Scott Paper as a $15-a-week salesman, when he was 23 years old. Scott Paper was then a small one-mill paper company. In 1917, he left Scott temporarily to serve in World War I. He enlisted as a private and advanced to captain by 1919.
McCabe returned to civilian life and to the Scott Paper Company at the age of 26. He advanced rapidly to become CEO. By the late 1940s, McCabe was described as having shown “an advanced and enlightened policy that made the company a recognized standard for modern manufacturing and sales operations.” Scott Paper was arguably one of the US’s first truly global companies.
Later, McCabe served as chairman of the Federal Reserve.
What was McCabe’s secret? How did he make Scott Paper great?
Every senior manager at Scott Paper had a plaque on the wall. The heading was Whom do we serve? The answer? Our nation. Our community. Our customers. Our workers. And our shareholders.
Shareholders are dead last!
Really? Last? McCabe explained: “If we serve the others well, then we will best serve our shareholders in the long run.”
As in many realms of life, Israel was powerfully influenced by the US in framing its corporate laws.
“It is no coincidence that the Israel Companies Act, 1999, expresses the same concept as the American Roundtable of 180 business leaders of the largest US corporations, who, two years earlier, in 1997, declared that the only goal of a company was to maximize profits for the shareholders.”
Zvi Stepak
Stepak: “It is no coincidence that the Israel Companies Act, 1999, expresses the same concept as the American Roundtable of 180 business leaders of the largest US corporations, who, two years earlier, in 1997, declared that the only goal of a company was to maximize profits for the shareholders.” [The US Business Roundtable is an association of chief executive officers of America’s leading companies “working to promote a thriving US economy and expanded opportunity for all Americans through sound public policy.”]
“The same organization declared, in its annual declaration in August 2019, that a business organization should act for the benefit of all its stakeholders, with shareholders appearing at the conclusion of the declaration. Without addressing the issue of the sincerity of the declaration (and I am convinced it is insincere as their behavior since then shows), those words have impact on their own.
“With regard to Israel. When I began to study this subject, it became clear to me, to my surprise, that Israeli law precedents and legal opinions greatly expanded the interpretation of Section 11, toward consistency with the principles of conscious capitalism.
“In conversations with leading jurists, some of whom contributed to the original legislation, there was widespread agreement that it is time to change Section 11. The proposed draft law will state that the purpose of a company is to increase its value over the long run, and the company is compelled (not only ‘ought,’ as the current Section states) to take into account all stakeholders.
“I began meeting with a long list of Knesset members from various parties several years ago; since then, we have had several national elections, and many of those whom I met with are no longer in the Knesset. I intend to renew these meetings; but regarding the ability to implement, I am dubious, given the makeup of the current government. Great importance attaches to who will be finance minister and the composition of the Knesset Constitution, Law and Justice Committee, and who will be its head.”
In the face of Netanyahu’s burgeoning far-Right government, it is wishful thinking to believe that Section 11 will be amended. But we, the people, can act to amend it in practice, if not in law.
Writing in the Huntington News, the newspaper of Northeastern University in Boston, Sean Connolly puts part of the blame for greedy capitalism on us myopic consumers:
“What does it matter if the minerals used in iPhones are mined by slaves in the Congo, so long as the phone works? What does it matter that a large quantity of clothes made abroad are produced in sweatshops, so long as they look good? And what does it matter that your Uber driver receives low pay, no benefits and no job security, so long as you get a quick ride?”
“What does it matter if the minerals used in iPhones are mined by slaves in the Congo, so long as the phone works? What does it matter that a large quantity of clothes made abroad are produced in sweatshops, so long as they look good? And what does it matter that your Uber driver receives low pay, no benefits and no job security, so long as you get a quick ride?”S
Sean Connolly
We consumers can take an interest in how and where companies make the goods and services we buy. We can vote with our money – and vote against the egregious greed by depriving the worst corporate offenders of money. Let’s take an interest in whether the companies we patronize are pro-McCabe or pro-Friedman in their behavior. It can, and will, make a difference.
Yes, it does matter where our iPhones, TVs, cars, clothes, food are produced. And no, it is not morally acceptable to support economic oppression by blindly buying its fruits.
I once heard a prophet of greedy capitalism try to justify it. “Capitalism is the only system that has generated sustained economic growth,” he said.
True.
“Capitalism is based on greed,” he went on. “Socialism has far better ethics. Socialism is based on helping your neighbor. In times of crisis – 9/11 – people come together and help their neighbors. But this cannot be sustained over the long term. That is a fact. So only a system where people can be rewarded for hard work by becoming wealthy can create sustained hard work, and energy, and economic growth.”
Oh no! False.
I have known a great many entrepreneurs over several decades. Many became super-rich. But their motivation was not to become rich. It was to create value, to change the world. Why else would an exit-rich entrepreneur launch another start-up…and another? And so many do.
Today, greedy capitalism generates massive untaxed wealth. A recent study by the US Office of Management & Budget found this disturbing fact: US billionaires pay an average federal individual income tax rate of just 8.2%.
That is a whole lot less than what ordinary working people pay. Why? Why not tax the rich to pay for child allowances, day care, better schools, healthcare and college tuition?
Greedy capitalism must give way to compassionate capitalism. To companies that serve the world, not just their shareholders.
It is a fact – human beings are inherently unequal.
Capitalism and globalization allow people to freely leverage their assets to build more wealth. It is the nature of capitalism, baked into the cake, that the more assets and resources you have, the more you acquire of them, and the easier it is to do so. The less you have, the harder it is to build wealth.
Inequality in the distribution of wealth and income is transmitted socially and fiscally from one generation to the next and, unless checked, tends to grow continually. Ultimately, the growing army of those who have nothing – either deprived groups within a country or entire impoverished countries shut out of global markets – rises and, out of desperation, seeks some way to seize the wealth of those who have everything. The result is highly destructive to society. Greedy capitalism is ruinous. Winners and losers ultimately lose together.
This is not Marxism. It is reality. The destruction caused by social strife can be prevented – by the strong desire of those who have wealth to achieve the esteem of those who lack it, by creatively redistributing their wealth in ways that do not destroy energy and industry among those who have wealth and want more or have none and aspire to attain some. Pay living wages. Implement profit-sharing. Pay management more modestly.
As the global distribution of wealth and income becomes alarmingly concentrated, the importance of the need to find practical and concrete ways to reform greedy capitalism grows daily.
Let’s start at home by amending Section 11. Words matter. Laws matter. Let’s send a message. Whom do businesses serve? Their community, their workers, their nation, their customers. When they do, we all prosper. ■
Conscious capitalism
Conscious capitalism is an approach to business management that focuses on creating value for all stakeholders, not just to maximize shareholder profit. It emerged because of the global financial crisis of 2008, widespread ethical crimes, and growing consumer awareness.
The bible of this movement is a book by John Mackey and Rajendra Sisodia, published by Harvard Business Review in 2014. A new edition has a section titled “Liberating the heroic spirit of business.” A global nonprofit organization, Conscious Capitalism, exists, which includes an Israeli chapter chaired by Zvi Stepak. The book has been published in Hebrew and includes a chapter on “conscious Israeli companies” and how they managed to protect worker well-being during the COVID pandemic.
The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com.