My presentation to the University of Connecticut School of Business MBA Class.

1. Toward Moral Capitalism Reconciling private interest with the public good Caux Round Table John Friedman – Sustainable Business Network of Washington BUSINESS LAW 5175 -- Business, Law &Ethics in Modern Society

2. The Caux Round Table (CRT) is an international network of principled business leaders working to promote a moral capitalism. The CRT advocates implementation of the CRT Principles for Business through which principled capitalism can flourish and sustainable and socially responsible prosperity can become the foundation for a fair, free, and transparent global society. The Caux Round Table Steve Young www.cauxroundtable.org twitter: @CauxRoundTable

3. Co-founding board member of the Sustainable Business Network of Washington (SB NOW); a partner organization with CRT 20 years+ career including corporate communications/organizational development, public/community relations, sustainability and CSR About Myself www.sbnow.org twitter: @SustBusNOW @JohnFriedman

4. Background History and theory Global financial crisis What happened What can/should we learn from it Moral Capitalism Determining ‘true’ value The Caux Round Table principles in action Overview

5. Capitalism is an economic, not a political model Culture (nationality, faith, etc.) define how capitalism is implemented Individual wealth creation – the ability to earn and retain capital – is a tremendous force for change Short-term thinking is inconsistent with long-term best interests At the outset …

6. 15th/16th Century Venetian accounting system and argosy voyages - entrepreneurs began to combine capital and labor in discrete projects. Evolved into going concerns called corporations 1600 – 1750 Capitalism grows prosperous in Holland, England and Scotland 1776 An Inquiry into the Nature and Causes of the Wealth of Nations - Adam Smith 1830 – 1870 Abuses of capitalism (mills of Manchester; Ebenezer Scrooge) Communist Manifesto – Marx, Engels Das Kapital- Karl Marx A Brief History of Capitalism

7. 1880 – 1980 Non-communist response: welfare state capitalism Bismarck’s reforms Free trade unions John Maynard Keynes / New Deal Japan, Inc. Austrian school of economics 1989 – 2004 Collapse of communism Rise of CSR CRT Principles for Business (1994) United Nation’s Global Compact (2000) Moral Capitalism - Stephen B. Young A Brief History of Capitalism

10. Does that (still) hold true in 2010?

11. Cash for Clunkers - Results

12. Sub-prime mortgage loans made, increasingly against future resale value of the home, not against real income Mortgage loans packaged and sold to global capital markets Collateralized debt obligation (CDOs) issued to finance purchases of packages of sub-prime mortgages and to invest in hedge funds Credit default swaps invented to give added value to CDOs Debt upon debt upon debt Low interest rate environment Incentive structure driven by fees, not investment in long-term returns So what happened?

13. 1620 Tulip mania 1711/1720 South Sea Company London 1719/1720 Mississippi company France 1929 Wall Street 1980s Junk bonds 1990s Dot.coms/telecom Today Sub-prime mortgages/CDOs Financial meltdowns are a systemic dysfunction of capitalism Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one. – Charles MacKay Irrational exuberance – Alan Greenspan

14. Current crisis is global AIG Fortis Iceland EU guarantees bank deposits UK takes over two banks Equity markets in Asia tank Price of oil drops by 50% Real economies lose employment and consumer demand Why is this time different? Is it?

15. World economic order has inadequate mechanisms to prevent financial crises World Trade Organization International Monetary Fund World Bank G20 Bank for International Settlements Etc.

16. Principles Outcomes Principles Congruent with Self-Interest Premises of Moral Capitalism Principles Drive Real Outcomes

17. Whenever a system produces a consistent result, the inevitable conclusion is that that system was designed to produce that result, regardless of whether or not the outcome matches the intended outcome. What are the principles that are driving outcomes? When short term shareholder returns are elevated to a core value, corruption is inevitable. – Noel Purcell, CRT Chair

18. When financial markets implode, markets lose liquidity, exchanges of goods and services fall, output is reduced, employment is cut Debt must be taken out of the financial system Asset values have to be reset at lower levels Asset owners lose wealth What happens when bubbles burst?

19. When the distance between the haves and have-nots is perceived as insurmountable; the status quo is threatened …

20. How do you determine ‘real’ value of assets? It is the INTANGIBLES that define value Bear Stearns (2008) March 14 - $80/share book value March 17 - $2/share May 10 – sold at $10/share after shareholder outcry and assistance from Federal Reserve Bank Lehman Brothers Despite billions in assets, management liquidated the company as no buyers emerged with confidence in it as a going concern

21. Most simple calculation: What is a company worth?How do we measure its value? Discounted net present value of future income Capitalization multiplier x

22. You cannot establish value without putting risk into the calculation What is the risk of not achieving predicted future revenue? How certain are estimates of future income? What are the risk factors that determine the capitalization multiplier? A higher risk demands a lower multiplier First Fundamental Conclusion Higher Increased Lower Risk Uncertainty present value Note: Each source of risk drives business value up or down

24. Risk reduction leads to higher valuationSecond Fundamental Conclusion

25. Stakeholder relationships entail risk - customers - investors - government regulators - employees Each relationship is an intangible asset of the business (assets can appreciate or depreciate) Lowering risk for each relationship enhances the quality of intangible assets and increases business valuation Strategies for Managing Risk

26. The Good The Bad The Ugly How do companies create value?

27. Risk Assessment/continuous Risk Reduction Optimize Stakeholder Benefits Moral Capitalism The Good

28. Feed Shareholders, Abuse Stakeholders Commodity pricing/ compete on pricing/low costs Rent seeking (market power) Take the money and run: short-term thinking Unsustainable Valuations =Eventual Failure The Bad

29. No net wealth creation; speculation in trading (Rob Peter to pay Paul) Irrational Exuberance (Market traders/short termism) False Valuations (Enron: Ponzi Schemes; sub-prime mortgages, CDOs…) Encourage unsustainable pricing (of securities CDOs, CDSs) INEVITABLE FINANCIAL MELTDOWN The Ugly

30. Intangible Assets = CSR Stakeholder Relationships Customers Employees Owners/Investors Suppliers Competition Strategies Community Support CSR and Valuation

31. Financial Capital Physical Assets Intellectual property Sustainability Brand loyalty Quality of employees Community support Labor environment Unallocated goodwill Tangible Values (Generally Audited Financial Information) Intangible Values (Generally Non-audited, Non-financial Information)

32. To improve company valuation,Improve CSR relationships! Good CSR Relationships Lead to The Sustainable Corporation Conclusion:

33. Far beyond the goods and services your company provides The IMPACTS* those goods and services and the manner in which they are produced have on peoples’ lives What does your company do? * Real and perceived

34. Needed for quality income Necessary to get low cost of capital Critical to hire/retain the best employees Gets you through rough times Avoids commodity pricing/builds value added Reputational Capital(brand equity; goodwill)

36. The power of reputational capitalFor whom would you rather work?For whom would you rather tell people you work?

37. The Theory of the Moral Firm (self interest considered upon the whole) Financial Capital Reputational Capital $$$ Sustainable profits; maximum value Physical Capital Conversion Process Output (Goods/ Services) Customers INPUTS Social Capital Human Capital RETURN ON CAPITAL (preserve adequacy of capital inputs)

38. The Corporate Improvement Cycle

39. Board of directors CEO Senior management Division heads and group managers Unit managers Employees Who participates?

40. An example Caux Round Table Japan

41. Vision not yet fully embedded across the company. No integrated local community development program across different countries. Company internal communication is poor on the issue of environment. Customers' trust is weak. Communication with suppliers/partners is poor. High level of compliance, risk management and internal audit have been achieved. Caux Round Table Japan

42. “It's not your blue blood, your pedigree or your college degree. It's what you do with your life that counts.” - Millard Fuller Businessman/entrepeneur attorney self-made millionaire by age 29 founder/president of 8th largest homebuilder in America

43. Thank you! Questions? Comments? Thoughts?