Q&A: HBS Prof. Rebecca Henderson On Reimagining Capitalism “Economic Growth Is Faster In Healthy Societies”

Rebecca Henderson is the John and Natty McArthur University Professor at Harvard University and recently authored the book Reimagining Capitalism In a World on Fire, where she takes on the question of why businesses must play a leading role in addressing the climate crisis. We recently had the opportunity to sit down with the renowned Harvard University professor to talk about why capitalism needs a transformation, how the coronavirus crisis has disrupted business-as-usual and her hopes for the future. 

GQ: Why does capitalism need to be reimagined, in your own words? 

RH: Capitalism needs to be reimagined because it is not working for very large numbers of people on the planet. It is creating long-term damage that will cause immense harm to the planet and to our society. Our capitalism has been radically unbalanced and this makes it dangerous. 

GQ: Your book is based on your popular course. Why did you create this course? How did it come about?

RH: About fifteen years ago, some of the world’s largest energy companies started showing up in my office. They could see the world was transitioning to carbon-free energy, and I had spent the first 20 years of my life studying large-scale strategic and organisational change. So I started working with these companies and discovered that the single thing most important to helping them change is some kind of tax or regulation on greenhouse gases. 

Intuitively, when renewable energy comes out of your socket, it doesn’t look any different to fossil fuel energy and firms that sell fossil fuel energy do not pay for the very considerable cost that it imposes on society. If you take, for example, five cents worth of coal fired electricity, it creates another 4 cents worth of health damage and another 4 cents worth of climate damage on future generations – and these are conservative estimates. If we are to transition the whole world into carbon free energy, you need an incentive. You need regulation to accelerate the innovation we need and I became interested in why business wasn’t pushing for this regulation because climate change is a huge danger to the long-term stability of the business environment. So I started a course at HBS to really work with the students and think through for myself about what businesses can do to build a more sustainable world.

GQ: What are your thoughts on WEF founder Klaus Schwab’s stakeholder capitalism, especially given its many critiques?

RH: Part of the problem is that there are many definitions of stakeholder capitalism. If by stakeholder capitalism we mean paying attention to all your stakeholders as you make your decisions – employees, customers, suppliers and local communities – as a way of running a thriving business, I think that’s just good business. 

If by stakeholder capitalism you mean changing the way in which firms are governed so that instead of responding only to investors, you have a legal responsibility to stakeholders, that can be an important way of addressing some of these issues, but it’s much more complicated than proponents of stakeholder capitalism sometimes seem to suggest. In Germany and Japan, for example, where firms are governed using a more stakeholder-friendly approach, it’s not simply that you change the rules by which corporations are run, but the entire society and many investors have signed onto the idea that corporations should focus on a wide range of stakeholders. When that’s the case, focusing on stakeholders can be powerful. But if you were to go to an ordinary corporation in other parts of the world, then the question is: who’s in charge? 

The great risk is that managers can say they are managing for stakeholders even as they buy themselves another corporate jet. For firms that are committed to stakeholders and have adopted clear measures of what that means and investors are totally on board, that can be powerful. 

My personal approach is to say that we need every firm to be aware that managers have a responsibility to not only investors, but to the long-term health of the society and the planet, and most specifically, to the institutions for which capitalism relies. I don’t think we will address the problems we face unless and until we make sure that the institutions that balance the firms – government, labour, free media, independent press – can really hold firms to account. And just saying “be stakeholder-oriented” isn’t an answer unless you have the “what does that mean?” and “what measures?” and “who is enforcing it?”. 

I believe in love, I believe in cooperation and being a part of something bigger than yourself and in real allegiance to the community.

Rebeccca Henderson, Author & Harvard Business School Professor

GQ: Then what about customer capitalism as the answer, as Steve Denning and Peter Drucker have argued?

RH: Again, firms really should care about their customers. But what do we mean by customer capitalism? Are we saying that investors have to get a lower return because they are doing everything they can to support customers? If customer capitalism is about the long-term prosperity of everyone, that isn’t customer capitalism, that’s just sensible and regular capitalism. But if you’re leaving money on the table, then who is investing in your firm? Or does customer capitalism mean that customers own the firm? Thats super exciting. But in either case, it must be clear who’s in charge for it to work. 

GQ: As an economist, would you agree that most of human behaviour can be explained by the impulse to survive and basic self-interest?

RH: No I wouldn’t. I think humans are much more complicated than that. The pandemic is a major disaster, but one of its potential silver linings is that it made us very aware of how dependent we are on each other and how the “it’s about me” attitude is very destructive. There is a part of us focused on survival, for sure. But there’s also a strong part of us focused on our families, children and communities. I believe in love, I believe in cooperation and being a part of something bigger than yourself and in real allegiance to the community. In the long-run, the reason humans are complicated is because pure self-interest, people who think about nothing but themselves, we call them psychopaths. Humans don’t like psychopaths, it’s not a great long-term strategy. As a species, we’ve learned to have both sides of ourselves – parts of ourselves genuinely committed to our families and communities and also the parts of ourselves that are selfish. We need both because there is no such thing as  a single individual standing on their own and surviving. Humans have to work with other people. As I said, the pandemic has really put into focus how interdependent we are. 

GQ: Aren’t shareholders always going to want profits, rise in share price and market cap growth above all else? Can shareholders ever be incentivised to care about society and the planet?

RH: I think they can. That’s at the heart of my book in many ways. Businesses can have strong incentives to care about the health of the planet and the health of our society. That’s easy to see at a collective level. Suppose you owned everything, do you have an incentive to care about climate change? Absolutely – it’s going to create all kinds of economic problems and have an enormous risk to the stability of the financial system. You also have an incentive to care about society because your business is going to grow much faster in healthy societies where people have access to healthcare and education, where there is more talent, better trade and consumers to spend. We know that economic growth is faster and more sustainable in healthy societies. 

There is also increasing evidence that investors don’t need to sacrifice returns. Research is clear that investors in firms that try to do the right thing and are committed to ESG metrics do not perform worse than conventional firms and can even perform better. 

And if we think about how the world will change going forward, many of the biggest investment opportunities are going to be solving these problems. I don’t think it’s a coincidence that Tesla is one of the most valuable automotive companies and I don’t think it’s a coincidence that one of the most successful IPOs in the past 20 years was Beyond Meat. We have to move, sooner or later. Businesses, consumers and employees are going to insist we start treating our society and planet gently. Firms out there in front are going to make a lot of money, so there is a huge investment opportunity. 

Lastly, many investors are so large that they can’t diversify away from the risk of climate change or that societies will falter. They are essentially holding the world as a portfolio. In my book, I talk about Japan’s pension fund, the largest pension fund in the world. Hiro Mizuno, who was the chief investment officer until recently, said the biggest threat to the long-term returns of his portfolio and pensioners’ is the risk of climate change. That’s an example of investors seeing that these risks are absolutely a risk to their returns. 

We know that economic growth is faster and more sustainable in healthy societies. 

Rebeccca Henderson, Author & Harvard Business School Professor

GQ: In your book, you speak about the intersection between inequality and climate change, in what ways are the two related?

RH: At the most basic level, climate change is going to hurt people at the bottom of the income distribution most aggressively and quickly. Right now, the burden of fossil fuels causes enormous health damage on top of climate change. Here in the U.S. and in many parts of the world, marginalised populations and communities of colour are exposed to the most damage because they are forced to live in high-pollution areas near these plants. So the fact that we are not responding to climate change is already imposing enormous harm amongst the poorest. As climate change hits, it’s going to hit marginal populations the hardest. Floods and droughts are becoming increasingly prevalent and it’s the people who can’t afford irrigation who are forced to migrate, it’s the people who cannot rebuild as the floods come who are going to be forced to move and live elsewhere. We see in the pandemic, that the odds of dying from coronavirus are dramatically higher if you’re poorer and communities of colour are disproportionately affected because their levels of welfare and income are so much lower. For me, inequality and climate are intimately linked and it’s about taking care of our society and the climate at the same time.

Also, just as we have a strong interest in preventing climate change, I believe that addressing inequality is in our interest. To the degree that people aren’t getting the education and healthcare they need, they are being systematically excluded from participation in the economic mainstream. We are losing people who can be fabulous entrepreneurs, employees or great consumers. Here in the U.S., within the next 20 years, half the talent pool is going to be people of colour. We need to make sure that all that potential has the supported needs to fully participate in the economy. One of the ways the economy can grow is bringing in marginalised populations into the economic mainstream.  

GQ: You’ve been teaching at MIT then Harvard, and in total teaching MBAs for 33 years now. What are some of the changes you have seen with regards to what your students care about generally? Have your students’ attitudes changed over the past decade in what is sometimes called the rise of “consumerist” culture? Do you see more of them interested in responsible business?

RH: They are so much more interested in these issues than they used to be. When I first started teaching, I didn’t remember anyone talking about these issues. Fifteen years ago when I first started my course on sustainability, students would sign up but it wasn’t a mainstream issue. When I first started teaching Reimagining Capitalism there were only 28 students in the room. Now, we have over 300 and I’ve been asked to take these ideas into one of the required courses in the first-year on leadership and ethics. I’ve gone from being a radical to the point that many MBAs accuse me of being too incremental! It’s so different than it was 10 years or even 5 years ago. Just as we have a strong interest in preventing climate change, I believe that addressing inequality is in our interest.

Just as we have a strong interest in preventing climate change, I believe that addressing inequality is in our interest.

Rebeccca Henderson, Author & Harvard Business School Professor

GQ: You also have spoken about how the pandemic illustrates “how quickly we can change when we need to”. We see a lot of people talking about change, but then going back to the way things were before. Do you think most people and businesses will structurally change the way they think and behave due to this crisis?

RH: I’m sure businesses can, but will they? As you know, I was the Eastman Kodak Professor at MIT for a long time. I spent the early years of my career working with companies trying to change and I know how hard it is. So I don’t want to minimise the depth of the change we need, or how difficult that’s going to be on the individual level. One of the wonderful things about publishing this book is that I’ve gotten the chance to meet so many amazing people working to change the world and their firms. All of them say that it’s pretty hard. There are loads of reasons why corporations are hard to change. When you think about how many moving parts there are, you don’t want to mess with things too quickly. It’s like changing the engine mid-flight. But can it be done? Absolutely. Will firms do it? I am hopeful they might. 

What the pandemic has done is alert us to the fact that things can go badly wrong. Before the pandemic, I would talk about how climate change can remake our society, and that inequality would lead to political breakdown. People have really changed the way they respond when I say these things now and there is a far greater sense of urgency. I also think the sense that our society isn’t working for people has become much stronger. People don’t believe capitalism works for them. 

I found in my research that two things help firms change fundamentally. One is a real sense that the cost of not changing is too big to manage. It’s much easier to change the firm if you can see that otherwise, you’re going to fly into the ground. The pandemic has shown that we can change in a matter of weeks, not months. We’ve shown we’re much more responsive and flexible than we thought. 

The other big thing to what really drives change is a shared sense of moral purpose. A sense that we must change and that it’s the right thing to do. Lots of research suggests that firms that have this have a much broader vision, they are more creative and more innovative than conventional firms. These are the firms that manage the large transitions – the moral purpose lets them deal with the uncertainty that comes with change. I think we can definitely change coming out of this. Is it guaranteed? Absolutely not. It’s important that all of us, as customers, as employees, as citizens, that we push for change. That we insist that firms have a sense of purpose and have a responsibility to the broader society and the world in which they’re embedded. 

GQ: Could you share what worries you in the world? What’s the thing that keeps you up at night?

RH: I bet they’re the same things that keep you up! I’m afraid that we’re going to come out of the pandemic poorer than we were and when people feel stress, they fall back on familiar behaviour and won’t take the necessary risks to build a better world even though it’s clearly going to be better for the long-run. I’m afraid that we’ll see more authoritarianism emerge as people come disillusioned with democracy. I’m afraid that climate change will happen fast – everything the scientists are saying is it’s happening faster than expected. I wake up at 4 in the morning and go: it’s too late. But that’s my 4 in the morning thought. When I get up I think: it’s easy to despair but what good does that do? Nothing! So like many of us, I spend my time trying to make a difference because if we all do nothing, nothing will happen. If we all decide this is the change we want, it certainly will happen. We have the technology and the resources to build a just and sustainable world and a general sense of that must happen. We have a business case for it too. The costs of doing nothing are greater than the costs of changing. So I think we’re going to be okay. 

GQ: Final question – team noodles or team rice?

RH: Rice!

Lead image courtesy of Rebecca Henderson.