Feature: Capitalism vs. Capital Markets

Don’t Confuse Capitalism with Capital Markets

Why the stock market doesn’t represent the true power of business

To many, the stock market is synonymous with the economy and, as a result, with capitalism.

But is it?

Increasingly, those within the Conscious Capitalism orbit say no.

“Stocks go up, and stocks go down—but none of that describes business. It describes the ways a business is financed,” said Sunny Vanderbeck, managing partner of Satori Capital, a conscious finance firm. “Public stock markets often result in a non-value creating Kabuki dance, which has nothing to do with capitalism.”

Capital markets are all the sources of equity and debt in the aggregate—they are the way businesses obtain long-term financing. But they don’t say anything about what makes a business successful or how it creates value.

The only pieces of the market that most people see are the public markets—the Dow Jones industrial average, the Nasdaq, and others—and they are dominated by a relative handful of the overall players. This fact is the source of growing disenchantment among both capitalism’s critics and Conscious Capitalism’s proponents.

Fewer than 1 percent of the roughly 27 million businesses in the United States are publicly traded, according to a report by the National Bureau of Economic Research. Those non-public companies have a vastly greater impact on the economy than the same 100 or so firms constantly named in the news. As just one example, small businesses accounted for 64 percent of net new jobs created between 1993 and 2011, according to the federal Small Business Administration.

There was a time was when a public company’s market capitalization—the market value of its outstanding shares—was closely tied to its true value and long-term prospects. Now a firm’s market capitalization can be influenced positively or negatively by a faceless analyst who does or doesn’t believe in the company’s short-term profitability. That facelessness has changed the way we do business, shifting us away from a once default approach to capitalism.

Throughout most of the history of capitalism, the largest employer in a small town would never have dumped chemical byproducts in a river behind their plant because they lived there and they had a cousin who lived downstream.

Sunny Vanderbeck

Neither would they squeeze employees and vendors, and try to extract every possible concession. “You don’t do that when you go to church with these people,” Vanderbeck said. “Conscious Capitalism becomes an obvious choice when you’re part of a community.”

But modern capital markets have led us astray.

Today, a conscious firm might decide to raise employee wages or to invest in technology to reduce the company’s carbon footprint. Some analysts consider those investments a theft of shareholder returns.

Making investments with a longer time horizon can be at odds with a single-minded focus on maximizing short-term gains and quarterly returns. Leaders may feel pressured to make trade-offs when faced with a shorter time horizon. But Conscious Capitalists know what the best businessmen have known for decades—that managing for the long term is the best way to create wealth and value for all stakeholders. In fact, Conscious Capitalists abhor trade-offs, working instead to find winning solutions for all stakeholders. Unfortunately, modern capital markets make it harder to do exactly that.

At age 26, Vanderbeck became one of the youngest CEOs ever to lead a Nasdaq company. He cofounded Data Return LLC, a leading provider of managed services and utility computing, which, after a successful IPO, achieved a market capitalization in excess of $3 billion. “I don’t regret it, but I don’t know that I would do it again,” he said.

“Some CEOs are trying to make the right choices for the long term, and they get pummeled for it,” he explained. The result is that business leaders pull their horizons in, which is bad for the economy and bad for capitalism.

The primary problem with today’s investor focus on quarterly earnings? “Profits are a lagging indicator of how much value you create for all the stakeholders,” Vanderbeck said.

Stressing that going public can be a good play for some firms who want to raise a large sum of money, Vanderbeck said that conscious firms have alternatives that can help them realize their visions without buying into a system that rewards the short term.

Satori, for example, buys all or parts of companies and partners with CEOs to help them reach their goals. Whereas many private equity companies might have to sell in five years or less to achieve a return on their capital, Satori’s time frame is decades. Other conscious financiers are popping up, eager to help conscious business owners achieve their dreams.

Earlier this year at Conscious Capitalism’s annual CEO Summit in Austin, Texas, Vanderbeck was recognized for his commitment to more sustainable investment strategies as a member of the inaugural “Heroes of Conscious Capitalism” Class of 2017.

Howard Fischer, cofounder of the conscious finance firm Gratitude Railroad, said the time is right for a new crop of investors who are willing to take a long-term view. “This is our role, our niche, in the impact investing space,” he said. “I don’t want the world to die. The solution is a wise investment in capitalism.”

Although this emerging breed of financier has a different focus than Wall Street traders, they all share a common bottom line. “Many investors are concerned solely with generating returns,” noted Eric Jacobsen, Gratitude Railroad cofounder. For years, Jacobsen and Fischer were themselves more typical investors, at one point managing a combined $2 billion in assets.  “But we do best when we pay attention to our investment’s impact on humanity—and care about returns at the same time.”

William W. Vogelgesang, partner of the conscious finance firm EPOCH Pi, said: “We want to change how capital markets work. People need to understand that there’s more to value than dollars and cents.”

Capitalism at its essence is a way to create value through a free exchange between parties. While today’s capital markets are concerned with money, returns, and risk, many see a fundamental change coming. “I think 20 years from now, capital markets will be more complex,” Vogelgesang said.

A study of capitalism is a study of what produces the most value for all stakeholders in a society, and what succeeds, above all, in elevating humanity through the value it creates.

Which points to another important reason that it’s a mistake to equate capitalism with publicly traded companies: stock markets reward short-term gains, but studies have shown that capital is more effective in producing value when managed for the long term. New research, led by a team from McKinsey Global Institute in cooperation with FCLT Global, found that companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2001 across almost every financial measure that matters.

Other recent research concluded that similarly sized private companies outperform their publicly traded competitors by a wide margin. Private company boards are able to focus on developing a long-term strategy, whereas public companies by necessity have a shorter-term time horizon and are focused on meeting regulatory reporting requirements.

Furthering the spread of Conscious Capitalism will require a change to the financial system. If shareholders and CEOs are in conflict under today’s system, the shareholders will almost always win.

“If CEOs want to run their businesses in a conscious way, they’ve got to get buy-in from the owners,” Vanderbeck said. John Mackey famously described investors as hitchhikers with credit cards—they’ll pay as long as they like where a business is going. But increasingly investors are seeing their roles differently. “We like to think of ourselves as your buddy who can take the wheel while you look at the map or tune the radio,” Vanderbeck said. “We are a partner on the journey to our destination.” When capital resources partner with minds that want to use those resources to generate the most prosperity over the longest arc—that is the essence of capitalism.