Featured, Features, Interview

Reimagining Capitalism

Ryo Takahashi, Editor-in-Chief

Rethinking firms and their role in society: Ryo Takahashi (MBA ’20) talks with Professor Rebecca M. Henderson.

It has been a commonly held belief that the purpose of firms is to maximize shareholder value.

This notion of shareholder primacy resonates with many business leaders’ understanding of their fiduciary duties, and with our norms of how a properly functioning, laissez-faire economy ought to work.

After all, say thinkers ranging from Adam Smith to Milton Friedman, wouldn’t the invisible hand lead a perfectly functioning, competitive free market to an efficient distribution of goods and services?

Why government isn’t a cure-all

“The problem with this idea,” says Professor Rebecca M. Henderson (MBA ’85, PhDBE ’88), “is that our markets aren’t perfect.

“Milton Friedman says your moral duty is to increase your profits, but this assumes that the market is free and fair. For example if there are externalities which are not fairly priced, there may be significant distortion in the markets, and if this is the case there’s no guarantee that maximizing profits will maximize social welfare.

“Take the energy industry for example. Today, energy is really just a commodity, and there’s no cost to generating or buying energy produced by fossil fuels. If instead we included the social costs of burning fossil fuels in their price—something to offset the millions of people who die every year due to the pollution that’s produced by burning coal, or to offset the likely future costs of the climate change fossil fuels are causing, we’d have an explosion of innovation and investment in renewable energy innovation, and we’d eliminate one of the greatest threats to the stability of our economic system,” she says.

But, some may argue, isn’t it the role of the government to address externalities? Professor Henderson disagrees.

“While it is true that climate change, inequality, and institutional degradation are at heart public goods problems, there are two problems with the idea that this problem is something for governments to solve and there is no role for business.

“First of all, we have no global governance, and many of these problems are global. And second, many governments around the world lack the legitimacy and capacity to address these issues. We see this today in the alarming spread of polarized politics and the rise of populism. That doesn’t mean that government isn’t important, of course—indeed I think business should be actively pushing for the regulation that will make the market both free and fair—but it does mean that business can’t sit back and wait for ‘someone else’ to take care of things.”

Enter the purpose-driven firm

Businesses, Professor Henderson argues, can and should address these issues. One answer, she says, is purpose-driven firms. Such firms stand to become profitable and competitive in a world where society increasingly recognizes their importance.

“This was perhaps best exemplified when Larry Fink’s 2019 letter to CEOs came out.

“Fink is the CEO of BlackRock, the largest asset manager in the world with over $6 trillion in assets under management. His letter suggested that business should care not only about shareholder value but also about social purpose.

“One CEO friend phoned me and asked, ‘he’s not serious, is he?’ He initially thought all the interest in sustainability stuff was just talk, but over time he began to realize that everyone he was trying to hire believed it was important,” says Henderson.

And, it seems, BlackRock isn’t an exception.

“Take Unilever. They claim their fastest growing brands are their purpose-driven brands—indeed that these brands are growing at twice the rate of conventionally managed brands.

“Purpose-driven firms have a significant advantage in attracting talent. Many of the smartest, most creative, and most imaginative people want to play a part in these kinds of companies. For several years, for example, Unilever was included in the list of the top 10 most desirable employers on LinkedIn.”

Hiro Mizuno, Executive Officer and Chief Investment Officer of the Government Pension Investment Fund of Japan (GPIF), which oversees $1.5 trillion in assets under management, is another strong proponent of business paying attention to the big problems.

“Hiro says, ‘You know, I have to be able to pay pensions in 30 and even 100 years from now. If global warming does what the scientists say that it will, this ability will be seriously at risk.’ He tells me, ‘I have a financial interest in the externalities because I have to hold the market. I cannot diversify away from the systemic risk.’

“It turns out that Hiro is both bottom line focused and purpose-driven,” says Henderson. “He thinks it’s not okay that the economy in Japan is going south. He is going to push ESG [environmental, social, and governance criteria] on every asset manager in the world. He is going to tell all his asset managers they have to pay attention to this and that they have to do something, since systemic risk is such a crucial issue for the long-term stability of GPIF.”

Reimagining capitalism

“I think capitalism is fabulous. It’s an incredible source of growth and opportunities. But if markets are distorted it’s no longer fulfilling its potential. If there’s no real equality of opportunity for example, then markets may not maximize either prosperity or freedom.

“It’s a mistake to put your head down and say, ‘All I have to do is maximize profits.’ People will come to you and say, ‘These problems—the inequality, the environmental destruction—this is your fault.’ You should at least have a response to that. Simply saying that government is going to fix it just won’t be compelling.”

Can businesses change the world? They can and should, says Professor Henderson. And together, we can see to it that they will.

The author would like to thank Professor Henderson for her input and comments for this article. Professor Henderson is the John and Natty McArthur University Professor at Harvard University. The title of “University Professor,” created in 1935, allows individuals whose work crosses the boundaries of multiple disciplines to pursue research at any of Harvard’s Schools; she is among 25 academics selected within Harvard for this honor.


Ryo Takahashi (MBA ’20), originally from Japan, is a management consultant and writer. Prior to Harvard Business School, he worked as a Project Manager at the World Economic Forum (WEF) and was a Senior Associate at McKinsey & Company. Prior to these roles he worked at the Economist and the Japan Times. His writing has appeared in Time magazine, the Economist, the Japan Times, and the World Economic Forum, among other outlets. He received his B.A. in Economics (with Distinction) from The University of Tokyo and was also a Rotary Scholar to the London School of Economics.

May 10, 2019
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