Capitalism: Version 2.0

The foundations of capitalism as we know it, which in the last 50+ years have seen a sway of the pendulum from Keynesian economics to Monetarist economics, will, as a result of the recent international financial crisis, subsequent market reaction and world governments' post-mortem legislation, be re-conceptualised and altered.

The year 2009 will, therefore, go down in history as a generation defining moment when the world economic system re-booted (after the 2008 financial crisis) and effectively installed a new and improved version- "Capitalism: Version 2.0". The re-booting process will involve international legislative changes in the coming months which will change the way business is done globally.

The USA will undoubtedly take the lead in this process but only once they have their new President, Barack Obama, at the helm in January 2009. The EU has already responded with its 100-day financial reform plan and more is to come. The talk of the (global) town is that we need to re-think the fundamentals of free-market capitalism.

We must regulate and control the human desire for greed and conversely, we need to have in place responsible economics and business behaviour. If we don't, we will quite literally bankrupt the entire world economy or trigger regional wars and/or environmental disasters which have a funny way of self-regulating the entire world system on our behalf but the consequences of which will be very painful for all of us!

Malta can and should take a lead in the evolving EU discussions, which will in the coming months shape the outcome of "Capitalism: Version 2.0" as recession bottoms out and we start to see a new economic world recovery. The position we advance should be what business consultants refer to as the "sustainability sweet spot" where long term business success, currently measured in profits, meets the common good. Put another way, where a company's "doing good" and "doing well" policies become synonymous.

I would go a step further, radically overhauling the way in which we measure business success (i.e. the generation of profits for shareholders) and introduce legislation to make Triple Bottom Line (TBL) accounting, which measures social, environmental and financial performance, a regulatory requirement.

What will therefore drive the new business model will be value creation for all stakeholders rather than just a narrow interest base (shareholders). To quote Henry Ford: "Business must be run at a profit or else it will die. But when anyone tries to run a business solely for profit then also the business must die, for it no longer has a reason for existence."

This is being said when the truth of the matter is that we need to change the fundamental economics of business. The accounting concept of "profit" is indispensable and at the heart of any successful business but "profit" is not (and should not) be the primary focus in "Capitalism: Version 2.0". Sure, at face value, this idea sounds like a radical non-starter but in reality all I am doing is to recognise the fact that "profit" is the means rather than the end of responsible and/or sustainable business.

The main driving force of professional managers or entrepreneurs should be to have a TBL accounting system. After all, business research increasingly shows that responsible business will be the new competitive advantage of the future and the best way to make above normal profits, since consumers will increasingly demand it given the fact that unrestricted and unrestrained capitalism is too dangerous in an interconnected global economy.

We therefore need to start lobbying in favour of Triple Bottom Line (TBL) accounting. This activity is not to be misconstrued as a way of adding administrative costs to businesses, especially SMEs, but a way of changing the way we perceive or understand business. Perhaps this proposal should form part of the EU's "Small Business Act" which anticipates a new statute for a European Private Company across Europe.

We must grasp the current opportunity and world mood, to remodel our antiquated (20th century) business model (profits at all costs) for the general good of global economic prosperity and international stability, and Malta can play a crucial role as Europe's moral leader by pushing through business ideas that will mould the 21st century.

Mr Fenech is a partner consultant with Fenci Consulting.