On April 11, 2013, Lady Lynn Forester de Rothschild and Sir Evelyn de Rothschild participated in a dialogue on Inclusive Capitalism, held on CKGSB’s Beijing campus. The wide-ranging and insightful discussion touched upon public confidence, equality of opportunities, sustainable economies, and preserving an inclusive society, among other issues. Below is a transcript of Lady de Rothschild’s keynote speech.
By Lady Lynn Forester de Rothschild at CKGSB in Beijing on April 11, 2013
Thank you, ZHOU Li, for your introduction. It is wonderful to be here and thank you to all of you who are here in the audience.
I am so pleased to be at this school to talk about the Henry Jackson Initiative on Inclusive Capitalism (www.inclusivecapitalism.org). I had the honor of being a co-chair of the task force, which is a US-UK private sector initiative. In a period of enormous political partisanship, our task force was decidedly non-partisan. We had people like Jon Huntsman Jr., who is the former US ambassador to China, who also ran for President as a Republican, and Larry Summers, a Democrat, who was President Clinton’s Treasury Secretary. We are non-political in spirit and our focus is on what we in the private sector can do to help restore confidence in capitalism.
Now, I know I am in a country that does not consider itself capitalist. The Economist refers to your economic system as “bamboo capitalism” or as “the rise of state capitalism”, but I don’t think the rest of the world has figured out the correct nomenclature for the amazing economic miracle in China. We have enormous respect and admiration for what this nation has done in improving the lives of hundreds of millions of people. You may not call it capitalism but what we are really thinking about are free markets and free trade. Our task force is united in a belief that, as the private sector, we have a duty to correct mistakes made in the business world.
It is not with a great deal of pride that I or any of us on the task force acknowledge that capitalism is under siege in the public mind. After the financial crisis, public confidence in the free market was truly shaken for politicians, for business leaders, and most of all, for the public. In 2008, there was a sense that big government and big businesses colluded against ordinary people, and that reckless investors, Ponzi schemes, careless lending, irresponsible borrowing, charlatan financiers, and under-regulation were part of the system. We had retirees who lost enormous amounts of their entire life savings while fat cats working for banks bailed out by taxpayer funds often walked away with hundreds of millions of dollars. It is widely perceived that the powerful are not doing enough to benefit the whole society.
Americans are also becoming increasingly more aware of the growing inequality in our country. I’ll give you several facts to show this. From 1979 to 2009, 275% of the income gains in our economy went to the top 1%. During the same period 40% of the gains went to the 60% in the middle and only 18% of the gains to the lower 20%. Between 2009 and 2010, 93% of the income gains in the first year out of the financial crisis went to the top 1%. This is really disquieting for society.
A professor from Harvard has a metaphor for the state of our capitalism which is instructive. Thirty years ago, Anglo American capitalism was the envy of the world, everyone wanted to be there because it was a beautiful open place to live. But today, it is viewed as an apartment block that has beautiful marble homes on top, with middle apartments that are cramped and dirty, and the lower floors are underwater. But what really upsets people is that the elevator is broken.
I believe that it is our duty to help make all people believe that the elevator is working for them. I am not talking about equality in results, but equality in opportunities; that whatever the station of your birth, you can get on that elevator to success. At the moment, that faith and confidence is under siege in America. I want to give you some more numbers from a 2012 poll conducted by Pew Research. Pew, an international polling organization, polled nations around the world with the same questions. They asked whether respondents believe their children will live better lives than they do today. Only 14% percent of Americans answered yes (by the way, in China, that answer was 57%). People were asked whether they felt their national economy was good, 31% Americans said yes, 83% of Chinese said yes. Next question, are you content with the national direction, 29% of Americans said yes, 82% of Chinese said yes. There was another poll on trust conducted by Edelman around the world. Edelman asked participants if they trusted government to do the right thing. 49% of Americans said yes, while 76% of Chinese said yes.
Figures like these in the United States are devastating to someone like me. I was born in 1954. I was a baby boomer, so I was born in the equivalent time for America that you are experiencing in China now. The future was beautiful. My father did not have a university education. He had four children, and he told all of us that no matter what he had to do, he would put all of us through university, because in the United States of America, if you work hard and play by the rules, anything is possible for you. As a result, I went to university and law school and my brothers went to university and medical school. Indeed, we have lived that American dream. We have a comedian now who says that the reason it’s called the American Dream is because you have to be asleep to believe it.
I still believe it, and I believe we can bring it back. I understand that you have your Chinese dream. It is one of the greatest feelings in the world to believe that it is possible to work hard and earn success and respect and security for your family. That is why I am so devoted to working toward inclusive capitalism, or inclusive growth, or whatever you want to call it, as long as it is inclusive.
I believe there are two reasons to care about preserving an inclusive society. First, there’s a moral imperative. I am so impressed that CKGSB focuses on the humanities and morality as part of your curriculum. I think that is at the essence of getting everything right, from your personal life to your business life. From a less personal point of view, if business does not help get it right, so that everyone feels invested and a part of our economic system, then bad behavior is going to lead to bad public policy. Inevitably, the government is going to do things that will drain the economic dynamism out of our economy. So as business people, we have a pragmatic reason to get it right for everyone– so that the government does not intervene in unproductive ways with business. I call the bad behavior to bad policy a vicious cycle; I think that we in private sector can turn that into a virtuous cycle. This is why I spend a lot of time making the case for inclusive capitalism to business leaders like you. I think that it is imperative for us to restore faith in capitalism and in free markets.
I think we can only have sustainable economies if we have inclusive growth. To get there, I go right back to the founder of capitalism—Adam Smith. In the 18th century, Adam Smith believed that the collusion of government with powerful business interests exercising near-total control of the market was unethical and also unproductive. He conceived of capitalism as an economic system that was in opposition to the mercantilism of his day—what we refer to today as Crony Capitalism. He believed that markets that favor consumers over the privileged aristocrats and politicians would unleash huge productivity gains. This system could create wealth across the board, and would encourage discipline, moderation and order throughout society. He defined the wealth of a nation as the wealth of the people in that nation. Moreover, he believed that you could both break the yolk of poverty and remove the manipulation of aristocrats and mercantilists through capitalism. Crucial to Adam Smith’s concept of how markets needed to work was his understanding of how we work as human beings. Seventeen years before he wrote The Wealth of Nations, he wrote The Theory of Moral Sentiment. He was first and foremost a moral philosopher, more than he was an economist. Philosophy was his first love. Adam Smith believed not that business or mankind would be selfless, but that our vanity for our position in society would lead us to do the right thing. Because by doing the right thing we gain respect from the people around us, which he believed was the most important objective of people in society. For this reason, I was very happy to learn that all of you at this school are required to do hours of community service and that the humanities is part of what you are learning as you are also studying management and entrepreneurial skills. You might have watched a movie called Wall Street that portrays greed as good, and the objective of life as money, cars, houses, and wealth for wealth’s sake. Well, that is the wrong set of priorities and it does not lead to happiness.
When you analyze when America started going off track toward greed and inequality, you find yourself in the ‘1980s. So, when John Kennedy talked about a rising tide that lifts all boats, he was talking about the world that I grew up in, the 1960s. The world in which I made my business career in the 80’s had already started to change. I think we have to change it back. Reflecting on Adam Smith, we can better understand free markets constrained by common values, and a fair sense of our future. We need to encourage success, praise entrepreneurs, and have the kind of initiative and hard work that I see all around this country. But we also have to keep focused on personal integrity and on concern for others.
I am optimistic that the private sector will lead the way on this. Most people in the West who benefited from the system want to make sure that it works for the broad base of the population. We have extraordinary people in America, like Bill Gates, who will give away billions, tens of billions of dollars and put it to good work. But we also have the small efforts of individuals and corporations throughout the West that you don’t hear of, but they also contribute to making our society more inclusive.
As most of you are Executive MBA students, I want to speak to you for a few minutes on our focus at the Henry Jackson Initiative on Inclusive Capitalism. Instead of naming and shaming bad behavior, we decided to try to identify pathways for business leaders: pathways that, for business reasons, create more inclusive growth.
One pathway that we identified as very important is that business leaders require work forces that are educated for what their companies need. McKinsey did a study: the United States has 30 million jobs that cannot be filled because of a lack of people qualified for those jobs. Right now in America, in order to get accepted to Harvard, you have to study and be proficient in trigonometry. Are there any land surveyors in this room? No. That’s what trigonometry is for. Knowledge of probability, on the other hand is not required. However, probability and mathematical engineering skills are what are useful in a high-tech world. They’re not required in American higher education today. The McKinsey study also states that by 2030, there are going to be 85 million jobs that are not going to have people with the right skills. So we, as business leaders, need to step up and participate in educating the work force we need.
On our website, you will see Rolls-Royce as one example of a company that is training its own work force. Twenty-five years ago, before anyone talked about corporate social responsibility, Rolls-Royce created an academy because they wanted their future leaders to be trained in all areas of the Rolls-Royce business, in quality control and in the values of Rolls-Royce. They offer training to fully-paid employees at the company, and now 25% of their top management are graduates of the Rolls-Royce academy.
I was impressed to learn that you have a company here called China Vocational Training Holding Co., Ltd., that educates its students for specific jobs and guarantees them a job when they graduate because companies have told the school the kind of skills that are needed. That’s a brilliant model. Obviously, it’s for people like auto mechanics and low-level engineers. But, that is a brilliant business initiative that is going to foster inclusive growth and provide jobs for people who cannot be in this room, but who are the people that we need.
Another pathway that we talked about is support for small and medium enterprises (SMEs). SMEs are a wonderful source of employment for millions of people. They need to be supported by financial institutions and by those of us in business. So, what have some of the great international corporations done to support SMEs? Hewlett Packard is an example. They opened up their operations in the UK, and they said by 2015, 10% of everything that they buy will come from SMEs. They are buying furniture, water, pens and pencils from SMEs in the United Kingdom. They are brilliant to do this, first, because it is fabulous public relations in the UK, and secondly, because it is broadening their supply chain.
There is another initiative created by IBM. Their foundation put $10m into the creation of the Supplier Connection, which is an internet-based platform where Fortune 500 and other large companies can post their requirements online and any company with fewer than 50 employees can go online and bid to become a supplier to some of America’s largest companies. UPS, AT&T, JPMorgan, and many other corporations signed up for it. The Supplier Connection is a fantastic initiative from the private sector to make our system more inclusive. There are many more examples of such initiatives.
The third pathway that we encourage is for investors. Many of you are making investment decisions and you are running funds. Well, if investors begin to demand long-term thinking—which is investment in employees and investment in your community (which is after all, your market)—instead of focusing only on quarterly results, we are going to have managers that behave better. This is part of the virtuous cycle of investors creating better behavior by managers. When capital starts requiring long-term behavior, we are going to be better off.
This is a movement that is actively embraced by the Ontario Teachers’ Pension Plan (a $125 billion pension fund in Canada) that decided they are going to invest in a few companies and demand to understand the long-term perspectives of the company, because they are investing for teachers who are 25 and won’t retire for another 30 years. They have a long-term view, so they will invest for the long-term. If you are a manager and you want funding from them, you will need to tell them how you are creating a sustainable business. There’s another wonderful example of a CEO, whom all of you should look up. His name is Paul Polman. He’s the CEO of Unilever and he is completely devoted to the proposition that Unilever has obligations, not only to shareholder value, but also to employees, to customers, and to the environment. He will stand in front of thousands of fund managers and say, “if you care about long-term sustainability of this company, then come and invest in our company. If you don’t care about that, you are perfectly fine, but go find some other place to invest.” That’s really courageous, and that’s going to happen more and more I believe.
In conclusion, I would like to share with you my favorite statement on capitalism. It was made by Yuval Levin. He said “Clearly, the case for capitalism requires us to roll back policies that have distorted the market’s ability to produce this wealth and cultivate these virtues. Properly understood, the case for capitalism is not a case for license or for laissez faire. It is a case for national wealth as a moral good; for the interest of the mass of consumers as the guide of policy; for clear and uniform rules of competition imposed upon all; for letting markets set prices, letting buyers make choices, and letting producers experiment, innovate, and make what they think they can sell— all while protecting consumers and punishing abusers. Capitalism is in trouble today because we have grown forgetful of the case for it. It is an argument for individual freedom amid moral order, and for prosperity sustained by sympathy and discipline. It is an odd modern hybrid: a conservative case for the liberal society.”
Public trust and confidence can fall very quickly. In 2000, 71% of Americans believed their children would be better off than they are, and today, that number is down to 14%. When our economy turns around and when we have better behavior by banks and corporations, I think that the poll results will change, too. America has had other periods when the public lost confidence in our government and our institutions, but we always came back. I believe that a path of inclusive capitalism will bring us back. The objective is to remain champions for wealth and success, to always applaud the great achievements of the Steve Jobs, Bill Gates and small entrepreneurs of our world, but also to always work to keep the elevator operating for all. We need to restore the rules of the road that gave cohesion to our society—faith that hard work and ingenuity can make anyone rich and successful.
You seem to be in a golden period in China, with hundreds of millions of people lifted out of poverty and enormous wealth creation. You want to sustain it by keeping the public with you, not just by protecting people like you, like me, but by protecting opportunities for all. The key is to keep the elevator working. Thank you very much for listening.