In his thought-provoking book "Prosperity," Colin Mayer presents a compelling case for transforming the corporate model into a force for good. As our world grapples with environmental crises and widening inequality, Mayer argues that businesses have both the potential and responsibility to address these pressing issues. This summary explores the key ideas in "Prosperity," offering a fresh perspective on how corporations can evolve to benefit society as a whole, not just shareholders.
Introduction: The Need for a New Business Paradigm
Our world is facing unprecedented challenges. Climate change threatens the very habitability of our planet, while economic inequality has reached extreme levels. Many of these issues can be traced back to prevailing business practices and the doctrines that drive the corporate world. However, Mayer contends that it doesn't have to be this way. Corporations weren't always solely focused on maximizing profits for shareholders, and they have the potential to be powerful agents of positive change.
"Prosperity" takes readers on a journey through the evolution of the corporate model, from its community-oriented roots to its current shareholder-centric focus. Mayer then outlines a vision for how businesses can be reimagined to create value for all stakeholders – including employees, communities, and the environment – while still meeting the needs of shareholders.
The Friedman Doctrine: A Flawed Foundation
At the heart of modern business education and practice lies the Friedman doctrine, named after economist Milton Friedman. This principle, introduced over 50 years ago, states that a business's sole social responsibility is to increase its profits within the bounds of the law. This idea has become so deeply ingrained in corporate culture that it's often viewed as an unchangeable natural law.
While the Friedman doctrine has undoubtedly led to some benefits, such as economic growth and job creation, it has also caused significant harm. The relentless pursuit of profits has contributed to environmental degradation, increased inequality, and a disconnect between corporations and the communities they serve.
Mayer argues that it's time to challenge this outdated paradigm. He envisions a world where businesses focus on doing good as part of their everyday activities, not just as an afterthought or PR exercise. This may sound idealistic, but Mayer reminds us that humans created the Friedman doctrine – so we have the power to create a new model that harnesses the good while mitigating the bad.
The Historical Context: How Corporations Lost Their Way
To understand how we can transform the corporate model, it's helpful to look at how it evolved over time. Mayer provides a brief history lesson to illustrate how corporations have gradually lost their connection to community:
Ancient roots: The concept of people coming together for business purposes dates back to ancient Rome.
Royal charters: Corporations were initially tools used by regents and parliaments to promote national interests.
Family businesses: Freedom of incorporation allowed families to set up companies, often with the intention of passing them down through generations.
Transnational expansion: As corporations grew beyond national borders, they became less tied to specific communities.
External investors: The introduction of outside investors meant family-owned businesses had to relinquish some control.
Shareholder primacy: Over time, corporations became focused on maximizing returns for shareholders, often at the expense of other stakeholders.
This shift has resulted in a loss of commitment to local communities. Corporations no longer see themselves as part of a diverse ecosystem of stakeholders, including employees, suppliers, customers, and the broader community. Instead, they've become primarily focused on short-term financial gains for shareholders.
However, Mayer argues that corporations still have the potential to create long-term value for all stakeholders. It's this capacity for long-term commitment that makes them powerful vehicles for positive change – if they choose to embrace it.
Redefining Corporate Purpose
One of the fundamental issues with the Friedman doctrine is that it confuses company directors about the true purpose of corporations. Mayer argues that the purpose of a corporation is not to make money, but to solve problems faced by society. Making profits should be a byproduct of fulfilling this purpose, not the primary goal.
For example:
- A washing machine manufacturer's purpose is to help people clean their clothes more efficiently.
- An internet service provider's purpose is to connect people and facilitate communication.
- An airline's purpose is to enable convenient travel between destinations.
Many countries have laws stating that companies should have a "normative purpose" – a commitment to doing good that extends beyond their immediate business interests. However, pressure from shareholders often leads to these commitments being sidelined or addressed in superficial ways.
To truly transform corporations into vehicles for good, Mayer suggests focusing on two key areas:
Effective governance: Corporate governance should support a company's true purpose, not just increase shareholder value. This includes:
- Structuring the board to facilitate the delivery of the company's purpose
- Appointing board members who align with this vision
- Implementing risk management strategies that consider all stakeholders
Expanding the customer base: Companies should consider everyone their activities impact as customers, including:
- Employees
- Suppliers
- Local communities
- The environment
This broader perspective can lead to growth, innovation, and increased resilience during economic downturns.
Implementing these changes requires visionary leadership – someone who can inspire trust in both shareholders and employees while rolling out significant corporate changes. While it may be challenging, evidence suggests that socially responsible business practices are associated with high returns, low risk, and low costs – benefits that appeal to all stakeholders, not just shareholders.
New Metrics for Performance Evaluation
To truly transform the corporate model, we need to rethink how we measure business performance. Currently, most corporations focus solely on financial and material assets when evaluating their success. However, this approach overlooks three crucial resources that every business needs to survive:
- Natural resources
- Social resources
- Human resources
Mayer argues that these assets should be considered alongside financial metrics when assessing a company's performance. This more comprehensive approach would provide a truer picture of a business's health and impact on the world.
To implement this new system of evaluation, Mayer suggests the following changes:
Account for all forms of capital: Include natural, human, and social capital in financial reports, alongside traditional financial and material assets.
Factor in maintenance costs: Consider the cost of maintaining or replacing natural, human, and social resources when calculating net profits.
Recognize investments: Make investments in staff education, community well-being, and environmental protection visible in financial reports.
Acknowledge liabilities: Record damage to natural, social, and human capital as liabilities in profit and loss statements.
Value restoration efforts: Record costs associated with maintaining or restoring natural, social, and human resources as assets.
For example, if a company's annual income is $100 million, but it has caused $30 million worth of environmental damage, its income should be recorded as $70 million. Conversely, if the company spends $40,000 on maintaining river health, its natural assets should increase in value by that amount.
By adopting this more holistic approach to performance evaluation, corporations can:
- Make more informed decisions based on a complete picture of their impact
- Allocate resources more effectively
- Contribute to the development of more accurate economic policies
- Take responsibility for the damage they cause to communities and the environment
This shift in perspective would help ensure that the true costs and benefits of business activities are accounted for, rather than being externalized to society or future generations.
The Role of Corporate Law in Transformation
Mayer emphasizes that corporate law plays a crucial role in shaping how businesses operate and impact society. All corporations exist because of corporate law, which provides the framework for how they are established, structured, and run. This means that the law has the potential to influence corporate behavior and drive positive change.
Traditionally, corporate law has been viewed as a set of rules that govern the mechanics of business operations. However, Mayer argues that it can be much more than that. Corporate law can be a tool for bringing different parties together to commit to delivering outcomes that would otherwise be impossible.
Currently, many companies have corporate commitments related to sustainability, inclusion, and other non-financial matters. However, these commitments often lack teeth because they:
- Are not governed by contracts
- Lack metrics for evaluating progress
- Don't define who's responsible for driving them
- Rarely include consequences for failure to deliver
To address these shortcomings and create a more robust framework for corporate responsibility, Mayer proposes expanding corporate law to include six forms of legislation:
- Enabling: Allowing corporations to make commitments
- Empowering: Giving corporations the tools to fulfill their commitments
- Enforcing: Ensuring corporations follow through on their commitments
- Requiring: Mandating certain socially responsible practices
- Refraining: Prohibiting activities that cause harm to stakeholders or the environment
- Restoring: Obligating corporations to repair damage they cause
This comprehensive legal framework would help balance the needs of shareholders with those of other stakeholders, including the community and the environment. It would allow directors to better navigate their responsibilities to both shareholders and the corporation itself, ensuring that companies can generate profits while staying true to their purpose of solving societal problems.
The Potential for Positive Impact
Throughout "Prosperity," Mayer emphasizes the enormous potential that corporations have to create positive change in the world. By redefining their purpose and adopting more holistic measures of success, businesses can become powerful agents of social and environmental progress. Here are some key areas where transformed corporations could make a significant impact:
Environmental stewardship: By internalizing the costs of environmental damage and investing in sustainable practices, corporations can play a crucial role in addressing climate change and preserving natural resources.
Social equity: Corporations that prioritize the well-being of all stakeholders can help reduce inequality by providing fair wages, supporting local communities, and investing in education and skill development.
Innovation for good: When corporations focus on solving societal problems rather than just maximizing profits, they can drive innovation that improves people's lives and addresses pressing global challenges.
Long-term stability: By taking a more balanced approach to stakeholder interests, corporations can build resilience and stability, better weathering economic downturns and contributing to overall economic health.
Restored trust: As corporations demonstrate a commitment to the greater good, they can rebuild trust with the public and create stronger, more positive relationships with all stakeholders.
Challenges and Obstacles to Transformation
While Mayer's vision for a transformed corporate model is compelling, it's important to acknowledge the challenges and obstacles that stand in the way of this transformation. Some of these include:
Shareholder resistance: Shareholders accustomed to prioritizing short-term profits may resist changes that appear to threaten their returns.
Ingrained mindsets: The Friedman doctrine has been deeply embedded in business education and practice for decades, making it difficult to shift mindsets.
Regulatory hurdles: Existing laws and regulations may need to be updated to support and enforce new corporate responsibilities.
Measurement difficulties: Developing accurate and widely accepted metrics for non-financial performance can be challenging.
Global competition: Companies operating in jurisdictions with less stringent requirements may have a competitive advantage, creating pressure to maintain the status quo.
Short-term thinking: The pressure to deliver quarterly results can make it difficult for companies to focus on long-term, sustainable value creation.
Despite these challenges, Mayer argues that the potential benefits of transforming the corporate model far outweigh the difficulties. With strong leadership, innovative thinking, and supportive policy changes, these obstacles can be overcome.
Steps Toward Implementation
To move from theory to practice, Mayer outlines several steps that various stakeholders can take to begin transforming the corporate model:
Corporate leaders:
- Clearly articulate a purpose beyond profit maximization
- Implement governance structures that support this purpose
- Develop metrics to measure performance across all forms of capital
- Engage with all stakeholders to understand their needs and concerns
Investors:
- Consider long-term value creation and non-financial performance when making investment decisions
- Engage with companies to encourage responsible practices
- Support shareholder resolutions that promote stakeholder-oriented policies
Policymakers:
- Update corporate law to require consideration of all stakeholders
- Develop regulations that incentivize long-term value creation
- Create frameworks for reporting and accountability on non-financial performance
Educators:
- Revise business school curricula to include stakeholder-oriented approaches
- Conduct research on the relationship between purpose-driven business and long-term success
- Promote interdisciplinary studies that connect business with social and environmental issues
Consumers and employees:
- Support companies that demonstrate a commitment to stakeholder value
- Advocate for responsible business practices
- Hold corporations accountable for their social and environmental impact
By taking these steps, society can begin to shift the corporate landscape toward a more balanced, sustainable, and prosperous future for all.
The Road Ahead: A Vision for the Future
As "Prosperity" draws to a close, Mayer paints a picture of what the future could look like if corporations embrace their potential as agents of positive change. In this vision:
- Businesses are driven by a clear sense of purpose that goes beyond profit maximization
- Corporate success is measured by the value created for all stakeholders, not just shareholders
- Innovation is focused on solving pressing societal and environmental challenges
- Companies take responsibility for their impact on natural, social, and human capital
- Economic growth is sustainable and more equitably distributed
- Trust between businesses, communities, and governments is restored
- The corporate sector plays a leading role in addressing global issues like climate change and inequality
While this vision may seem ambitious, Mayer argues that it's not only possible but necessary for the long-term prosperity of both businesses and society as a whole. By reimagining the role of corporations and aligning their activities with broader societal goals, we can create a more sustainable, equitable, and prosperous world for current and future generations.
Conclusion: A Call to Action
"Prosperity" concludes with a powerful call to action for all those involved in the business world – from corporate leaders and investors to policymakers and educators. Mayer emphasizes that transforming the corporate model is not just a theoretical exercise, but an urgent necessity in the face of mounting global challenges.
The book reminds us that corporations are human creations, and as such, we have the power to reshape them to better serve society's needs. By embracing a new paradigm that balances the interests of all stakeholders, corporations can become powerful forces for good while still delivering value to shareholders.
The journey to transform the corporate model won't be easy, but the potential rewards are immense. As we face critical issues like climate change, inequality, and social unrest, reimagined corporations could play a crucial role in creating solutions and building a more prosperous future for all.
Mayer's vision in "Prosperity" challenges us to think beyond the status quo and imagine a world where business success is measured not just in profits, but in the positive impact created for people and the planet. It's a vision that offers hope and a practical roadmap for creating a more sustainable and equitable global economy.
As readers close the book, they are left with a sense of both responsibility and possibility. The transformation of the corporate model is not something that will happen on its own – it requires the active participation and commitment of individuals and organizations across all sectors of society. But with concerted effort and a shared vision of a better future, we can harness the power of business to create lasting prosperity for all.