“The War for the Soul of Capitalism” – An Interview with Philip Kotler
You have made a distinction between companies that care about their social obligations and companies that don’t. Why is this such a big deal? Economists used to say that the only responsibility of business is to make a profit. Many companies still believe that. What do you say to that?
The idea of brand activism is not really a new one. In our book, Corporate Social Responsibility, we interviewed 45 companies. We asked each company: “Do you give money to charity? Have you adopted a favorite cause? Why did you choose that cause? Do you monitor whether the money has helped the cause? Do you know whether your company’s reputation improved as a result?” Our book shows the findings. Consumers who are interested in buying from caring companies will have a better sense of whether the caring is real or just window-dressing.
But what is now critical is to understand is that the landscape has changed.
Millennials led the way, but now most customers have high expectations for brands. We live in a world filled with constant problems – air pollution, bad drinking water, crimes, income inequality.
The brands that show real concern not just for profits but for the communities they serve, and the world we live in are the ones that are coming to the forefront.
A caring company must make its activities visible to its customers. It needs to show its values and commitments early, and that it cares about its people, cities, communities, and the planet.
If you present the evidence, customers will reward you.
More and more customers are become aware of their voting power in the market place and that they favor buying from caring companies. And when you add social media to the mix, there is “instant activism.”
What do you think of the recent scuffle between Kraft Heinz and Unilever?
That is exactly the issue. We are fighting a battle, as Bill George says, for the soul of Capitalism.
As George explains, you have Unilever CEO Paul Polman championing sustainable growth in earnings to raise long-term shareholder value. On the other side, you have KHC’s Bernardo Vieira Hees and its Brazilian owner 3G Capital. They want to maximize short-term earnings to increase near-term valuation.
Of course the outcry was loud, and 3G withdrew its offer just 50 hours after it was made.
I agree with George when he says that the larger issue at stake here is not just the fate of a single company, but the fate of capitalism itself.
Is it really that bleak? What can businesses do to understand their place in society?
We have a disconnect. Businesses that think they exist independent of society are not going to last. Perhaps it is the fault of our MBA education and perhaps it is the fault of our business culture that still emphasizes “maximizing shareholder value.”
Even Jack Welch is now reversing his philosophy. In his now infamous interview with the Financial Times he tells us – “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”
Where did this idea of “maximizing shareholder value” come from?
I think it was Roger Martin who said that this mess begins with Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester. They published “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” in the Journal of Financial Economics. That was in 1976.
The article was intellectually and philosophically incorrect. It basically said that shareholders are the owner of the business, while the executives are agents who are hired by the principals to work on their behalf. Jensen and Meckling argued that the goal of a company should be to maximize the return to shareholders.
And that was the biggest scam in business. Now anything goes under the mantra of “maximizing shareholder value.”
What do you mean?
Well, let’s reference Peter Drucker. He tells us that the only valid purpose of a firm is to create a customer I am convinced that the polarization in society, the stark rise in income inequality and the staggering rise in the levels of CEO pay are directly related.
I agree with Bill George when he says that unconstrained capitalism focusing on short-term gains can cause great harm to employees, communities and the greater needs of society.
And it is precisely because of this that we have the rise of populism around the world.
Our titans of industry are shooting themselves in the foot by not comprehending the existential threat populism holds for the future of their businesses.
But isn’t this really about price? Don’t customers deserve the best and lowest prices?
That is again a misapplication of the philosophy that low prices are the end-all.
Do we really want low-prices that are the result of exploitation, slave labor, or environmental degradation on the other side of the globe? The true cost of low prices is that the cost is borne by society – to its detriment.
Globalization has brought many changes, and as we are learning now, not all of them were good. The feelings of powerlessness and frustration in a world dominated by wealthy elites has led to the resurgence of nationalism, protectionism, and growing threats of war and violence.
Our business leaders forgot their history.
Let’s discuss the concept of Demarketing. How does that play into all of this?
We have built this unsustainable worId on the backs of consumer debt.
The question is how do we get people to use a scarce resource more carefully.
We started thinking about this in our 1971 article called Demarketing, Yes, Demarketing.
The 4Ps (product, price, place, promotion) provide solutions:
First, we design products that will use less water, such as by designing more efficient showerheads. Second, we raise the price of water to discourage consumption. Third, we make less water available in certain channels. Fourth, we use promotion to make people more ashamed of wasting water.
The demarketing idea is very generic. We just reverse the direction of the 4 Ps.
Make the product less necessary, more expensive, less available, and more shameful. Companies like Patagonia will sell you a jacket that lasts a lifetime. They’ll even repair it for you. This is good sense. It should be a best practice for the future of product development.
Does the conflict also arise out of the power structure within organizations? How many CEOs were promoted from sales, where they are responsible for “maximizing revenue”?
If you look at a study done by Harvard Business Review on the Best Performing CEOs, we learn that there are so many reasons for leaders to focus on the short term: slow growth, shareholder activism, political turmoil—to name just a few. Yet the study highlights the CEOs that still manage to focus on the long term and deliver strong performance over many years.
Prior to 2015, the rankings were based purely on financial returns; by that measure Jeff Bezos of Amazon led the pack for three years running.
What’s interesting is that when HBR started including ratings of companies’ environmental, social, and governance (ESG) performance as a variable, there was a big shift in ranking.
There’s a profound discussion led by Adi Ignatius on this – with Novo Nordisk CEO Lars Rebien Sørensen, WPP CEO Martin Sorrell, and Inditex CEO Pablo Isla – the three top ranked CEOs based on paying attention to their ESG performance.
So how should businesses change? How can they become more caring and still balance profit-making with the future?
Perhaps the best explanation of this comes from Ratan Tata who tells us that
Profits are like happiness in that they are a byproduct of other things. Happiness, for example, can stem from having a strong sense of purpose, meaningful work and deep relationships. Those who focus obsessively on their own happiness are usually narcissists — and end up miserable. Similarly, companies need a purpose that transcends making money; they need sustainability strategies that recognize that you can make money by doing good things rather than the other way around.
Marketers need to lead the way, working with their CEOs to nurture the future. The $64,000 question is: How do we create and nurture markets, communities, and the future of society?
INTERVIEW by Christian Sarkar.
Philip Kotler is the “father of modern marketing.” He is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management at Northwestern University. He was voted the first Leader in Marketing Thought by the American Marketing Association and named The Founder of Modern Marketing Management in the Handbook of Management Thinking. Professor Kotler holds major awards including the American Marketing Association’s (AMA) Distinguished Marketing Educator Award and Distinguished Educator Award from The Academy of Marketing Science. The Sales and Marketing Executives International (SMEI) named him Marketer of the Year and the American Marketing Association described him as “the most influential marketer of all time.” He is in the Thinkers50 Hall of Fame, and is featured as a “guru” in the Economist. He is the author Confronting Capitalism: Real Solutions for a Troubled Economic System, 2015; and Democracy in Decline: Rebuilding its Future, 2016.