Compassionate Capitalism: Filling in the Details

By Shlomo Maital

   In an earlier blog, I proposed that businesses adopt a new formula for free-enterprise capitalism: Price at cost. I called this “compassionate capitalism”, suitable for this new era of unprecedented unemployment, hardship and economic collapse. The goal: Preserve jobs, keep businesses alive, but help the people stretch their diminishing incomes.

   My close friend in Vietnam, Tran Luong Son, reports that the idea is resonating in his country, but there remain many practical questions. Let me try to answer some of them. In general, I propose to launch a voluntary group of visionary business leaders, willing to embrace C c (the capital C is for compassion, the small ‘c’ is for capitalism), and to commit to a small number of Cc principles.

Can you outline a clear simple methodology for applying Cc?

  1. Open an Excel sheet for each of your products and services.
  2. Begin with variable costs (costs of production and distribution). Wages: lower than pre-plague but reflecting the needs and productivity of workers; senior management take proportionately bigger cuts. Materials: Take into account second sourcing – businesses that used a single source are, in many cases, in trouble.
  3. Cost of capital: This is an opportunity cost. The risk-adjusted return on capital has declined, but is recovering. Use again the principle of fairness: Owners of capital need a return on their money, but not as high as pre-plague. They too must take cuts, as do wage-earners.
  4. Fixed costs: Governments are part of this. They need to contribute as well, by reducing income and profit taxes and property taxes. Many governments have job-preservation schemes, to replace unemployment insurance with partial wage subsidies.
  5. Prioritize: Apply the McCabe principle. Tom McCabe was the legendary CEO of Scott Paper, making it a great global company. He had every senior manager put this plaque on the wall: Whom do we serve? 1. Customers 2. Our community 3. Our country 4. Our employees. 5. Our shareholders.   Shareholders last???? McCabe had a simple answer. Of course. If you serve the other four well, you will best serve your shareholders, in the long run.   This applies more than ever now. In Cc compassionate capitalism, serve your customers, your community and your country, and your employees. They come first. This is what capitalism should look like, if we are to sustain it.
  6. Use the “value sharing” principle.   When I taught this to MBA students, there was blood on the floor. They were taught to profit maximize. This is more than obsolete, it is immoral in today’s plague-ridden world.

     a) Estimate the value your product or service creates, by the average amount your clients would be willing to pay for it, if you ‘squeezed’ them at the maximum. ($). b) estimate the cost of providing the product or service, taking into account maximum productivity and hidden costs (opportunity cost of capital – see above). c) set the price as close as you can to cost, while sustaining the business and its jobs. To maximize client margin (the net value your clients get from your product). These days, ‘value’ is way down, for most products and services, because our income and disposable income are way down. If you still manage to generate ‘client margin’ (net value for clients), you will have loyal customers for three generations or for a century. We customers will not forget who served us (McCabe principle) and who ripped us off.

   Capitalism can no longer afford to maximize ‘company margin’. The game today is to maximize ‘client margin’.