Corporations and citizens alike are confronted with two major forces that seem to be converging at this point in history: societal demand for a greater emphasis on sustainability, and major business disruptions. In this context, it is no surprise that leaders call “to build a world that is greener, smarter, and fairer” (Georgieva 2020, 11). This article argues that to gain a better understanding of these trends, it is important to examine the concepts underlying such transformations, i.e. ownership and citizenship, and their interdependencies. It proposes an integrated analysis of these two concepts by applying a life-cycle perspective.
The Challenge: A Linear Perspective on Ownership and Citizenship with an Intra-Generational Mindset
The role and responsibility of business in society is an issue that never seems to be resolved and remains a subject of controversial discussion. While some argue that the "business of business is business", i.e. the shareholder perspective (e.g. Friedman 1970), others view business as having a broader responsibility, i.e. the stakeholder perspective (e.g. Freeman 1984). While there is an ever-growing number of contributions to this debate in light of changing social and environmental challenges (e.g. Elkington, 2020; Henderson, 2020 or Mackey, Mcintosh and Phipps, 2020), the basic argument remains the same. Often in such debates, the view expressed is that two fundamental economic and societal concepts compete rather than complement each other: ownership and citizenship.
Ownership as the main tenet of capitalism stipulates that natural, i.e. individuals and artificial persons, such as corporations, have property rights that enable them to demand rent from the use of those assets. In some cases, individuals are the owners, in other cases it is a collective or a community. This brings us to the second concept.
Citizenship is a concept at the heart of collective governance. It states that individuals and institutions are part of a larger community, which grants them certain rights and duties. The precise nature of these rights and duties is the result of a continuous process of collective negotiation, achieved through various means such as elections, public discourse or lobbying.
Invariably, the combination of these two systems is seen as a conflict, not least over which concept should take precedence. While in most legal systems the concept of citizenship de jure takes precedence, citizens often express their discontent that ownership seems to have more power de facto, which is perceived as unjust.
We will argue that the core of this separation is a linear perspective on ownership and citizenship combined with a cross-generational way of thinking. Proponents of the concept of ownership frequently look at ownership from a purely transactional perspective, whereby each property has a value determined by the market. In this pure form, properties can be sold or bought at any time. Therefore, the transaction becomes an end in itself and no longer a means, as the financialization of the economy illustrates.
Proponents of the concept of citizenship, on the other hand, often fall into the inertia trap when they argue that citizens' rights and duties are predetermined, thereby neglecting, willingly or unwillingly, changes in citizens' expectations. Political polarization and turbulence can be seen as expressions of this inertia.
In summary, a critical challenge in applying both concepts is an intra-generational mindset. In each case, decision-makers tend to maximize their value while holding power over property or citizens, either by taking a short-term perspective in the case of property or by trying to extend the status quo by holding on to political power. From both perspectives, decision-makers fail to focus their actions on ensuring an optimal outcome for future generations and tend to optimize the outcome within the timeframe of their generation.
The Solution: A Circular Perspective on Ownership and Citizenship with an Inter-Generational Mindset
The starting point for any solution to overcome these challenges, and the perceived mismatch between the two concepts, must be to change the way of thinking from an intra-generational to an inter-generational direction. Decision-makers with a cross-generational mindset see themselves primarily as stewards rather than mere beneficiaries. They direct their behavior toward optimizing the outcome in the long term, for future generations.
By thinking as stewards, the decision-makers change their perspectives on ownership and citizenship. As a result, the two perspectives complement rather than compete with each other: The underlying dynamics are seen as cycles that follow a natural flow seeking to balance different forces. In both cases, we can rely on well-established thinking based on a circular perspective (even before the term ‘circular’ was even used).
Creative destruction by Schumpeter (1942) can be considered as the most popular circular perspective on ownership. Schumpeter (1942, 82-83) describes it as a "process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Schumpeter (1939) based his considerations on his earlier work on business cycles, drawing on Kondratiev’s (1926) seminal work on cycles to explain the recurring economic cycles of expansion, boom, recession and depression.
Christensen (1997) complemented this perspective by translating the concept of creative destruction into an organizational phenomenon that popularizes the idea of disruptive innovation, i.e. new products or services that make others obsolete. At the same time, he stressed the importance of using released capital from efficiency innovations to fund disruptive innovation efforts.
If we apply these concepts to the ownership of companies, we can identify four cycles every organization embarks upon when playing their part to drive creative destruction (Hilb 2020):
Formation: Every new venture requires an initial investment in the form of capital. This is made by investors who have capital to invest and are convinced of the innovative potential of a new company.
Acceleration: As companies grow, more capital is needed to finance expansion. New capital is used to create market share.
Consolidation: When companies achieve a strong position in their respective markets, the capital generated is used to strengthen their position or is reallocated to other, more promising investments.
Energization or exit: At some point, the company is no longer suitable for further capital injections unless it is fundamentally rejuvenated. Otherwise, capital is released and passed on to other, disruptive companies with more potential.
In a perfect world, the four phases follow a natural flow that not only produces disruptive innovations, but also increases overall prosperity (i.e. a larger cake) and ensures that wealth is shared among those who contribute to the creation of wealth (i.e. a fair share of the cake).
As we all know, the perfect world does not exist. There are a number of obstacles that impede this natural flow:
First of all, limited cognitive abilities of decision-makers often lead to a misallocation of capital due to a lack of understanding of the innovative power of certain companies.
Secondly, the risk appetite of capital providers varies over time and depends on personal circumstances, leading to different assessments of the value creation potential.
Thirdly, non-value-added investment activities, i.e. rent-seeking, tend to be more lucrative than value-added investment in the face of protectionist institutional frameworks.
Finally, the latter point may be accentuated by the tendency for insiders to try to protect their position by changing the rules or resisting necessary changes.
The last point is a direct intervention in a well-established cycle that balances private and public interests. Again, we can borrow from an established theory to better understand the circular nature of citizenship. Hirschman (1982) observed in his analysis of US history a recurring pattern of cycles dominated by private interests followed by periods of public action. He read in this pattern an ongoing process of balancing the power of the state and the individual. This thinking also coincides with the institutional theory of Scott (1995), who argued that positions shared and popularized in a community can, over time, lead to new arrangements for the whole of society (Scott, 1995).
If we apply and expand these concepts by introducing two middle levels, i.e. the institution and the community or ecosystem, we arrive at four cycles leading to alignment between citizens’ interests and societal actions:
Private interests of individuals: If we assume that each individual is autonomous and has individual interests, they will find ways to express them in the light of the public action they experience.
Collective interests of institutions: The private interests of business owners and decision makers in organizations translate into another set of private interests of artificial persons, i.e. institutions, taking into account the private interests expressed by individuals.
Joint action in communities and ecosystems: Different interests expressed by individuals or institutions lead to joint action. This can either result in strong alliances for a common goal or help resolve a conflict by building consensus between parties with conflicting interests.
Public action in society: Ultimately, society as a whole expresses its collective will, based on the perception of how well communities and the ecosystem function and are able to address societal problems.
Here too, various actions can hinder the smooth running of the process necessary to achieve a balance of interests. In extreme cases, this may incite revolts or even revolutions:
Firstly, individuals or groups may be inclined to impose certain behavior on others, for example through strikes, intimidation or dictatorship.
Secondly, some parties will choose more subtle means to influence others, e.g. through lobbying, propaganda or corruption.
Thirdly, a tendency exists for different interest groups to form alliances in order to create and protect privileges.
Finally, there is always a danger that some may discriminate against others in order to safeguard their privileges, e.g. through moralizing, identity politics or apartheid.
How can smooth transitions in ownership and citizenship cycles be ensured? How can the value of property and citizenship be released most effectively? We believe that two conditions must be met to ensure the integrity of the two cycles.
Firstly, a circular view of both ownership and citizenship can inspire actions that are oriented toward long-term results. With this perspective, sudden or even surprising events are no longer considered in isolation, but rather as one element in a long chain of events that contribute to the balance of the system.
Secondly, it is crucial that decision-makers adopt a stewardship perspective by considering themselves as guardians of organizations or assets who are merely charged with looking after them for a short period of their entire life cycle. Their main task should be to leave the organization in a better condition than they found it when they joined, thus ensuring its longevity.
With these two principles, organizations would behave in a more sustainable way and take an active role in facilitating the balance of power in society. As a result, there would be less friction in both cycles and more prosperity and perceived fairness in society overall.
How to Get There: Drawing a Roadmap Toward Circular Capitalism
As simple as it sounds, transforming capitalism and changing the behavior of decision-makers is a complex process. It requires a shift to adopt perspectives that are transformational. Such transformational change can only be successful, i.e. go beyond the tipping point (Gladwell 2000), if it comes from within a system and if it is inclusive.
Consequently, the transformation to circular capitalism calls for joint action by all key parties:
Business owners: Business owners play a crucial role in setting the course and convincing others to follow. If their decisions are based on circular reasoning and a custodian's way of thinking, they will achieve more sustainable results in the long run.
Investors: Defined as owners of shares but without business interests, investors are important influencers whose behavior will guide others. They play a central role in the allocation of capital and the setting of investment criteria. Together with business owners, they also play an important role in selecting and creating incentives for managers.
Managers: Although managers often do not own their businesses, they perform a vital role in decision-making. The circular perspective and stewardship thinking should be at the heart of their professional self-image.
Regulators: Regulators hold the keys for converting individual or institutional interests into public action, e.g. by enacting new laws. This requires a deep understanding of the circular nature of capitalism, combined with a strong stewardship perspective, which is already expressed in the concept of the civil servant.
Citizens: Dual roles are required of citizens. Firstly, they may undertake one of the roles described above. Secondly, they are citizens in the original sense, i.e. they are part of society. In this capacity, citizens set expectations and act accordingly when defining circular capitalism as an overarching ambition.
Academics: Last but not least, academics have to play an important role in enabling and facilitating this transformation. Not only are they able to act as objective observers and analysts, they can also play an important role as historical consciences that remind other actors of earlier debates and relevant classical theories that help them to address the underlying tensions.
Even if circular capitalism in its purest form remains a utopia and the obstacles along the path to circular ownership and citizenship cannot be completely removed, the goal is worth pursuing. In order to change a system, it is crucial to better understand all potential obstacles and endeavor to find solutions rather than just treating the symptoms. A full understanding and appreciation of the underlying dynamics of ownership and citizenship will prove essential on this journey. This will inevitably take more time than scratching the surface, but it is the most promising approach to moving toward a greener, smarter and fairer world (Georgieva 2020).
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This article appeared in SN Business & Economics in January 2021.