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Reimagining Capitalism in a World on Fire


It would be hard to come up with a who’s who of business school gurus these days that didn’t include Rebecca Henderson. After crossing and re-crossing the Charles River between the Harvard and MIT B-schools over a three-decade career, she’s landed as one of just 25 University Professors at Harvard. Her breakthrough course “Reimagining Capitalism” ballooned from a few dozen to 300 students in recent years. And judging by her delightfully accessible new book, that’s not surprising. Reimagining Capitalism in a World on Fire * is at once a cool-eyed examination of contemporary global capitalism’s increasing dysfunction and a strikingly optimistic guide to how the system could remake itself as an engine of economic justice and environmental sustainability. Here, we excerpt portions of the chapter on when business self-regulation works, when it doesn’t – and why.

— Peter Passell

Published October 23, 2020


*Published by PublicAffairs (Hachette Book Group)2020. ©Rebecca Henderson. All rights reserved

If every firm on the planet adopted a purpose beyond profit, pursued a shared value strategy and was supported by sophisticated investors committed to the long term, it would be an enormous step forward, but nowhere near enough to solve huge problems such as climate change. Too many of these problems are genuinely public goods problems – solving them would benefit everyone, but no single firm has the ability to solve them on its own.

The voluminous trade in trash, from plastic soft-drink bottles to hazardous medical waste, did not exist in the pre-container era: shipping recycled newspapers 5,000 miles was not worth the cost. Its prominence in the 2010s was just one manifestation of a world in which distance and borders mattered less than before. Demand to export beef, soybeans and palm oil brought the loss of forests and marshlands, contributing to the extinction of entire plant and animal species. Freer trade tempted manufacturers to flee countries with tight environmental controls for places where rules against dumping toxic chemicals and polluting the water were less likely to be enforced. Particulates from Indonesian coal burned in Pakistani power plants blew across Asia’s borders. The explosive growth of long-distance trade made almost every economy more transport-intensive, increasing the use of petroleum-based fuels and thereby contributing to the ceaseless rise in the concentration of greenhouse gases that were changing the earth’s climate.

We won’t solve the climate crisis, for example, until and unless we can agree to leave the great forests standing. But if your competitors won’t stop cutting down the trees, you, too, may have to cut them down to survive.

Industry-wide cooperation, or “self-regulation,” is one potential solution. This isn’t an entirely crazy idea. Many of the central institutions of the 19th century American economy – including the New York Stock Exchange and the Chicago Board of Trade – were voluntary associations formed to address the public goods problems thrown up by the maturing U.S. economy. Banks joined together to create nonprofit clearinghouses to provide emergency loans during financial panics. Railroad industry associations developed standards for cross-country timekeeping, for mechanical parts and for signaling. Most of the rules governing international trade are designed and enforced by the International Chamber of Commerce, a voluntary association founded in 1919.

But cooperation is fragile. Here, I explore the factors that make sustained cooperation possible. I suggest that even when they fail – and they often fail – cooperative efforts can lay the foundations for more robust solutions, particularly partnerships with local governments and others in pursuit of the common good.

Orangutans on the Building

Gavin Neath, the chief sustainability officer at Unilever, arrived at work on Monday, April 21, 2008, only to discover that eight people dressed as orangutans had climbed to the balcony above the entrance to Unilever’s London headquarters and unfurled banners proclaiming “Dove: stop destroying my rainforest.” The press had descended and were asking everyone they could corner what Unilever was planning to do next.

The people in the orangutan outfits were from Greenpeace and were protesting Unilever’s use of palm oil. Unilever, Greenpeace declared, was responsible both for the destruction of the rainforest in Borneo and the near extinction of the orangutans who lived in it. Cheap and versatile, palm oil is the most widely consumed oil on the planet – and it was in most of Unilever’s products. Unilever was the world’s largest buyer.

The uncontrolled production of palm oil is an environmental disaster. To clear land for cultivation, growers set fire to primary forests and peatlands, releasing carbon into the atmosphere on an enormous scale. Deforestation also pollutes local water supplies, degrades air quality and threatens to destroy one of the world’s most biologically diverse ecosystems.

The Greenpeace activists were particularly furious that Unilever had played an important role in the foundation four years earlier of the Roundtable for Sustainable Palm Oil, a collection of NGOs and palm-buying companies dedicated to growing palm more sustainably. But “not a single drop” of sustainable palm oil was yet available.

Within a month Patrick Cescau, Unilever’s CEO at the time, had publicly pledged that by 2020 Unilever would be using nothing but sustainable palm oil. The announcement got Greenpeace off Unilever’s back – at least for a while – but created its own problems. No one inside the firm had a roadmap for how to pay for what might be as much as a 17 percent increase in the cost of one of Unilever’s most important commodities, particularly when consumers didn’t like being reminded that their lipstick (or their food) had palm oil in it in the first place.

Daniel Berehulak/Getty Images

Help arrived from an unexpected quarter. In January 2009, Cescau was replaced as CEO by Paul Polman, the first outsider in Unilever’s 123-year history chosen for the top job. Polman had left Proctor & Gamble, one of Unilever’s largest competitors, three years before to be CFO at Nestlé – another of Unilever competitors – but missed out on the CEO job there in 2007. He arrived at Unilever with something to prove at a time when the firm was widely perceived as falling behind. One observer characterized Unilever as “the basket case of the (consumer goods) industry.”

Polman’s former colleagues suggested that he had a “tough, take-no-prisoners style.” But it turned out that Polman was a more complicated man than he first appeared. When Neath raised the question of sustainable palm oil with him, his immediate response was “we have to do it and we can’t do it alone: let’s socialize the problem.”

This is the central premise of industry self-regulation. If all the firms in an industry need something done – or stopped – but are unable to address the problem acting alone, it may be possible to solve it together. Any single firm that chose to use sustainable palm oil not only faced the daunting challenge of finding sustainable oil to buy, but also risked putting itself at a very substantial cost disadvantage. But if all the firms in an industry could be persuaded to move together, buying sustainable oil would become a cost of doing business that all firms undertook to reduce the risk of damage to their brands.

When I suggested to one historian of selfregulation that industry-wide cooperation might play a central role in solving the world’s great problems, he giggled. His view was that self-regulation is rarely effective except in the shadow of government regulation. But desperate times call for desperate measures.

Building Cooperation at Global Scale

Five years ago, I thought of the palm oil case as one of the great examples of successful cooperation in the service of the common good. Today it’s clear that this verdict was premature.

Unilever succeeded in socializing its problem: the vast majority of its competitors have agreed to switch to sustainable oil. But cultivation continues to be a major driver of deforestation. It has become clear that the only way to solve this latter problem is in partnership with investors, local communities and local governments.

Polman began his efforts to socialize his palm oil problem by reaching out to members of the Consumer Goods Forum, some 400 manufacturers and retailers generating $4 trillion in revenues and employing nearly 10 million. In early 2010, Polman began to advocate for the idea that stopping deforestation should be a key issue for the forum. His efforts were greatly helped by a Greenpeace attack on Nestlé. Greenpeace released a spoof ad, showing a bored office worker biting into a KitKat and finding himself eating an orangutan’s bloody finger instead. (You can see it on YouTube, but be warned – it’s not pretty.)

Neath and Polman introduced the group to Jason Clay of the World Wildlife Fund, who argued that the road to sustainability lay in precompetitive cooperation by a small number of major companies. I’m told this was ferociously difficult to organize, and antitrust concerns meant that the minutes of every meeting and all the documents they generated had to be scrutinized by lawyers. Nevertheless, the steering group ultimately reached an agreement.

In November 2010, at the UN’s 16th climate conference, Muhtar Kent, Coca-Cola’s CEO, announced that the members of the forum were committing to zero net deforestation by 2020 for the four commodities most responsible for driving global deforestation: soy, beer, paper and board, and palm oil. Polman and his colleagues had succeeded in persuading nearly every major Western consumer goods company and retailer to commit to buying and selling only sustainable palm oil – defined as deforestation-free palm oil grown under well-regulated labor conditions.

Polman and his colleagues began by trying to create a reliably sustainable supply, reasoning that it would then be relatively easy to observe whether firms were buying from it. As a first step they began by focusing on the three firms that handled the vast majority of the international trade in palm oil: Golden Agri- Resources (GAR), also the largest grower of palm in Indonesia; Wilmar, which handled almost half of all globally traded palm oil; and Cargill, the world’s largest trader in agricultural commodities. They believed that if they could persuade the three firms to commit to zero deforestation, they would together push a large majority of palm oil suppliers toward sustainability.

GAR had adopted a zero-burning policy in 1997, but had continued to clear forests without permits, disturbing areas of deep peat and thus releasing enormous amounts of carbon. At the end of 2009, Unilever announced it would no longer buy from GAR unless the firm changed its practices. The move sent shockwaves through the palm oil industry, triggering riots and demonstrations in Indonesia. But in 2010, Nestlé joined Unilever in pressuring the firm, and Kraft and P&G quickly followed suit.

In February 2011, GAR pledged not to clear high conservation value forests and peatlands, and to refrain from clearing forest areas storing large amounts of carbon. The four companies then resumed doing business with the firm. When asked why GAR became the first Indonesian palm oil company to announce a forest conservation policy, Agus Purnomo, the chief sustainability officer of GAR, said, “Is it because we want to go to heaven? No. Of course everybody wants to go to heaven, but we are doing it because our buyers asked us to do it.”

At the same time, members of the CGF began to reach out to Wilmar and Cargill to persuade them to change their sourcing policies, complementing the efforts of a number of NGOs that had been targeting Wilmar for years. Fortuitously, in June 2013 thick layers of soot and haze caused by illegal wildfires burning in Indonesia blanketed Singapore, Wilmar’s hometown. The press attention led Wilmar’s CEO, Kuok Khoon Hong, to engage with leading NGOs in the palm oil space. “He talked a lot about how upset he was at the haze in Singapore and in China,” one of the activists recalled. “He just needed to be given a business rationale to go ahead.”

In December 2013, Wilmar signed a sweeping “No Deforestation, No Peat, No Exploitation” pact, and in July 2014 Cargill released an updated policy committing to deforestationfree, socially responsible palm oil.

Translating these commitments into action on the ground was the next hurdle. The first point of contention was to define exactly what counted as “sustainable.”

Translating these commitments into action on the ground was the next hurdle. The first point of contention was to define exactly what counted as “sustainable.” One option was to use the standards developed by the Roundtable on Sustainable Palm Oil (RSPO), a multi-stakeholder partnership that had been founded in 2004. “In the beginning it was very, very tough,” Roundtable CEO Darrell Webber explained, “but at the end of the day, trust was built.”

Under RSPO’s 2005 guidelines, the growers, who paid for the audits, were assessed for certification every five years and, if certified, monitored annually. The certification remained entirely voluntary but could be withdrawn at any time in the case of infringement.

Given the strength of the economic case for switching and the readiness of many NGOs to call out firms that didn’t do the right thing, many people – including me – were confident the Consumer Goods Forum’s actions would dramatically slow palm oil related deforestation.

But between 2001 and 2012 deforestation rates in Indonesia more than doubled, falling only slightly between 2012 and 2015 and increasing significantly in 2016. Rates fell again in 2018, but Indonesia is still losing hundreds of square miles of forest cover every year. Meanwhile, the share of the world’s palm oil that is sustainably grown has not budged since 2015.

A number of factors appear to be responsible. The first is the failure to anticipate that, while the business case for switching to sustainable oil was relatively strong for the big Western buyers and the large palm oil suppliers, persuading the small farmers who grow nearly 40 percent of the crop to stop cutting down the forest was another challenge again. Two hectares (five acres) of cleared rainforest planted in palm could provide enough income to send a family’s children to university. Moreover, programs to support smallholder farmers become more sustainable were having only mixed success.

Smallholders typically achieve yields of less than two metric tons per hectare, compared to the six to seven reached by bestpractice plantations, so increasing smallholder efficiency is one possible solution. But improving smallholder productivity is difficult. And smallholders also had to be financed – first with higher-quality seed and equipment, and then throughout the first, non-productive years of oil palm growth.

Indonesian forest clear cut for a palm plantation.
Reuters/Roni Bintang

The legal and political environment was another major challenge. Over 90 percent of the world’s palm oil is grown in Indonesia and Malaysia, and in both countries, it is an important pillar of the economy. In 2014, for example, agriculture made up over 13 percent of the Indonesian GDP and provided twothirds of rural household income to approximately 3 million people.

Many politicians in both Indonesia and Malaysia believed there was a direct conflict between economic development and sustainability. Worse, Indonesian law required land concession holders to develop all of the land they had been allocated, regardless of company policy.

Another major problem is that there is simply too much money to be made in cutting down Indonesia’s forests. An increasing fraction of globally traded palm oil is sold to Indian and Chinese firms, and few of them have shown any interest in sustainable oil. Moreover, the Indonesian Ministry of Forests, which has partial responsibility for land use and allocation, is notoriously corrupt, and retiring civil servants often buy a palm oil mill or two “for their retirement.”

Does this mean self-regulation has failed? Yes and no.

It has failed to stop deforestation so far but has significantly increased the odds of stopping it going forward. The business case for action remains strong, but someone needs to be able to enforce cooperation. The decadelong struggle to reduce the deforestation associated with soy and beef production in the Amazon suggests that the secret is to partner with the public sector.

The soy story begins on familiar ground. In 2006 Greenpeace published “Eating up the Amazon,” a report claiming that Archer Daniels Midland (ADM), Bunge and Cargill were actively contributing to the destruction of the rainforest through their financing of soy production. Deploying protestors dressed in seven-foot-high chicken suits outside Mc- Donald’s (95 percent of soy is used as animal feed), Greenpeace accused the Western firms buying Brazilian soy of helping to destroy one of the world’s last great rainforests and cooking the planet.

Greenpeace published its report (and let loose its chickens) in April, demanding that the entire food industry exclude soy produced in the Amazon from their supply chains. Three months later a group that included not only ADM, Bunge, and Cargill but also McDonald’s and the two Brazilian industry associations that controlled 92 percent of Brazilian soy production, agreed not to purchase soy grown on Amazon lands deforested after July 2006.

In 2009 Greenpeace issued a report accusing the cattle industry of clearcutting mature forests. Federal prosecutors in the Brazilian state of Para began suing ranchers who had illegally cleared forestlands.

The moratorium was monitored by the Soya Working Group, which included soy traders, growers, NGOs, commercial customers and the Brazilian government. Farmers who violated the moratorium were prevented from selling to the moratorium’s signatories and could find it difficult to obtain financing. In the 10 years after it was signed, soy production in the Brazilian Amazon nearly doubled, but less than 1 percent of the new production was on newly deforested land.

In 2009 Greenpeace issued “Slaughtering the Amazon,” a report accusing the cattle industry of clear-cutting mature forests. Federal prosecutors in the Brazilian state of Para began suing ranchers who had illegally cleared forestlands and threatened to sue retailers who were buying from them.

In response Adidas, Nike and Timberland (among other companies using Brazilian leather) announced that they would cancel their contracts unless they could be assured that the leather was not implicated in the destruction of the Amazon. And the Brazilian Association of Supermarkets called for the beef they sold to be deforestation-free.

The shares of Brazil’s four-largest meatpackers fell significantly as a result. Together they signed what became known as “The Cattle Agreement,” banning the purchase of cattle from newly deforested areas. Continued customer pressure – including a 2010 commitment by the members of the Consumer Goods Forum to buy only zero-deforestation beef – helped to keep the moratorium in place.

Here again the active support of the Brazilian government was particularly helpful. Most of the Brazilian Amazon has been formally protected by the Forest Code since 1965. But the code was rarely enforced until the 2010s, when the combination of the soy and beef moratoria and the development of sophisticated technology for tracking deforestation gave it new life.

The soy and cattle pacts were remarkably successful. Between them, they dramatically slowed deforestation in the Amazon at a time when rates of deforestation increased significantly nearly everywhere else. In both cases government support was critical – as the dramatic acceleration of deforestation in the Amazon following Jair Bolsonaro’s repudiation of his predecessor’s policies makes only too clear.

But in both cases government support was catalyzed by private sector action. The industry’s commitment gave the government political cover to enforce the law – and provided critical technical know-how and ongoing support. My guess is that this experience will prove to be the model for future self-regulatory efforts.

Chirawan Phongat and her neighbours are the first independent small farmers worldwide to receive the seal of approval for sustainable palm oil.
JDPA Picture Alliance Archive/Alamy Stock Photo

In palm oil, extensive and well-funded efforts at self-regulation have succeeded in making major gains but have not achieved their original objectives. The industry has begun to look to local regulatory authorities as partners in achieving fully sustainable supply chains. One possibility is to build partnerships with local politicians, NGOs, and communities in an attempt to build a business case for converting entire regions to sustainable palm.

Similar conversations are happening in the textile business in the context of some promising early success. One study of the Indonesian apparel industry, for example, found that self-regulation was significantly more likely to increase wages when the selfregulating body worked closely with the state and when local unions were mobilized to push for state action.

What Makes the Difference?

Why do some self-regulating organizations succeed while others fail? One answer emerges from the history of the Institute of Nuclear Power Operations.

The institute was founded in 1979 following the nearly catastrophic nuclear reactor meltdown at Three Mile Island. Historically, the industry had been regulated by the Nuclear Regulatory Commission, a U.S. government agency. But it was essentially a technologically focused institution, and the independent commission set up to investigate the accident concluded that organizational and managerial issues were the primary cause rather than problems with the technology.

Many nuclear power workers had gained their experience working with fossil fuels and had assumed that they should run nuclear plants similarly – namely, as hard as possible until they hit problems. Many managers and operators seemed to lack a sense of the vastly greater destructive potential of nuclear energy. When individual plants did learn something about how to run a plant more safely, the information was not shared with other firms. The 55 utilities operating nuclear power plants in the U.S. set up the Institute of Nuclear Power Operations as a private selfregulatory organization to fill this gap.

Veterans of the U.S. Navy’s nuclear program staffed the INPO. The Navy’s nuclear program was famous for its zero-accident record and a culture that placed safety first, second and third. The Navy men (they were all men) developed procedures for the industry and provided operational support for their adoption through an aggressive program of training and plant visits.

Each plant was extensively evaluated each year. Institute employees would show each plant how it compared to its peers across critical performance indicators – and then offer to work with the plant to bring performance up to par. If an executive was found to be uncooperative, the institute could also threaten to contact the company’s board of directors.

Between 1980 and 1990, the average rate of emergency plant shutdowns fell more than four-fold, and the institute is widely credited with this success. It is still in operation today and continues to be entirely funded by the nuclear industry.

In principle, these investors have enormous power to move the entire economy in more sustainable directions. All they have to do is find a way to cooperate.

Nobel economist Elinor Ostrom’s pioneering work uncovered many examples of successful industry-wide cooperation. In one of her most famous studies, she examined the Maine lobster industry. Lobster stocks declined dramatically in the 1920s and 1930s. In response the state-imposed regulations on the size and number of lobsters that could be taken. Local lobstermen then self-organized to enforce these limits. They agreed to throw back breeding females after punching a notch in their tails, and established a system for dividing the fishing ground among themselves and an enforcement mechanism to prevent violations. Lobster stocks were back to sustainable levels by the late 20th century and are now booming.

The U.S. lobster industry has rebounded thanks to aggressive management of fisheries.
Woodysphotos/Alamy Stock Photo

The lobster and nuclear power cases graphically illustrate the conditions that must be in place if self-regulation is to succeed. The first is that sustaining cooperation must clearly be seen to be in the interest of every-one involved. One reason the nuclear utilities were so eager to cooperate after Three Mile Island was that they feared that a single slipup at any nuclear plant could put the entire in-dustry out of business. This was also the case in the lobster industry, where continuing to overfish would certainly throw everyone out of work.

Cooperation is also much easier if it’s hard to enter the industry and difficult to leave. Nuclear plants have a 60-year life and cannot be moved. The lobster fishers had gone into debt to buy boats and equipment – assets whose value would fall close to zero if the fishery collapsed.

But these two conditions are only enough to ensure everyone will cooperate if it’s in no one’s interest to cheat or free ride. One of the reasons that voluntary bodies like the International Chamber of Commerce are so often successful is that the benefits they offer are tangible and immediate, and the temptation to cheat is small. When this isn’t the case, cooperation will only survive if it’s easy to see if someone is not pulling their weight.

In the nuclear case, annual inspections by the Institute of Nuclear Power Operations served not only to bring every plant up to speed but also to ensure that all the utilities were using the best technology. Lobster fishing catches are harder to observe, but the small size of the lobstering communities made it relatively easy to detect cheating.

The fourth condition is that it must be relatively easy to punish those not playing by the rules. In one incident in the nuclear case, after years working privately with the management to fix California’s Rancho Seco nuclear reactor, the institute informed the government’s nuclear regulators about the reactor’s numerous safety violations. The regulators then conducted their own inspection and subsequently ordered it shut down.

In the lobstering case, poachers could expect a series of gradually escalating sanctions. A tag would be tied to the poacher’s trap to signal that he had been caught. If the poaching persisted, other lobstermen might cut the rope leading from the buoy to the trap, making the trap impossible to retrieve. Poachers who persisted could expect damage to their boats.

Investors as Enforcers

In the United States, 65-70 percent of all equities are held by index and quasi-index funds. These investments are completely exposed to system-wide risk. Their owners cannot diversify away from the risks that accelerating rates of environmental degradation present to the entire economy. The best way to improve their performance is to improve the performance of the economy as a whole.

In principle, these investors have enormous power to move the entire economy in more sustainable directions. All they have to do is find a way to cooperate. If the largest asset managers decided together to require all the companies in their portfolios – or all the companies in a particular industry – to move away from fossil fuels or to end deforestation, it would be an enormous step toward building more sustainable societies.

It’s not quite that easy, of course. Take, for example, the ongoing effort to use investor power to arrest global warming. Climate Action 100+ (CA100+) was founded in 2017 with the goal of persuading the world’s 100 most important carbon emitters to, as one reporter put it, “cut the financial risk associated with catastrophe.” The group is an affiliation of some 450 investors who between them control nearly half the world’s invested capital.

They have three goals. The first is ensuring that every firm in which they invest has a board-level process in place to deal with the firm’s climate risk. The second is to have every company clearly disclose these risks, while the third is to persuade each firm to take action to reduce greenhouse gas emissions across its value chain rapidly enough to be consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below 2°C.

In London, students who are members of an international coalition, demand action to prevent further global warming and climate change.
Alamy Stock Photo

The business case for participating in CA100+ is well defined: the investors who have joined it believe that climate change presents a clear and present danger to the long-term value of their investments from which they cannot diversify away. But this doesn’t mean that coordinating the group is entirely easy.

CA100+’s actual work is done through a mix of public letters, formal and informal conversations with company management and the filing of shareholder resolutions submitted to a vote of the entire shareholder base at the company’s annual meeting. Individual investors take responsibility for coordinating action with respect to a particular company, building a coalition among the company’s investors to press for change.

In June 2019, investors from CA100+ pushed Shell into announcing short-term targets for limiting greenhouse gas emissions, and persuaded BP to support a shareholder resolution that binds the company to disclose the carbon intensity of its products and the company’s plans for setting and measuring emissions targets. The filing of shareholder resolutions might not sound like worldchanging stuff, but can be a powerful way of putting pressure on the firm.

Still, engaging with companies in this way is costly, and Climate Action 100+ faces a classic free-riding problem: there’s a real risk that any particular institutional investor will be tempted to let the others do all the hard work. My sense is that, at the moment, leading members are using a mixture of moral suasion and in-group shaming to persuade everyone to participate.

Do we really want the world’s largest asset owners to exercise this kind of collective power? We might.

These owners are already exercising enormous power – but in the service of pushing the firms in their portfolio to race to the bottom. A central element of a reimagined capitalism is a reimagined financial sector that takes its collective responsibilities to the world seriously and is willing to act on them.

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