“I believe that climate change is potentially a catastrophic risk to our entire economy” Harvard Professor

Rebecca Henderson, Author of ‘Reimagining Capitalism In A World On Fire’ and Harvard Business School Professor joins Yahoo Finance’s On The Move to assess how the U.S. can reinvent capitalism as well as fight against inequality.

Video Transcript

JULIE HYMAN: One of the ongoing themes we have been talking about amidst this pandemic is whether it will cause companies, governments to re-evaluate systems of all kinds, but particularly systems with how we treat workers and what our capitalist system looks like. That is a perfect topic for our next guest. She is Rebecca Henderson. She is a professor at Harvard Business School and the author of "Reimagining Capitalism in a World on Fire." And by the way, that world on fire is not necessarily our current moment. This was written before this pandemic even hit.

Rebecca, thank you so much for joining us. You're joining us from New Hampshire. Do you think, though, that even before this, yes, you saw this need to reimagine capitalism. Do you think what's happening right now will actually spur that change?

REBECCA HENDERSON: I hope that it will. Clearly, this is an incredibly difficult, moment and we could come out of it much poorer, and really just trying to make ends meet for a little while. But I am very hopeful that the current crisis will really support a reimagination of our current system.

I think what we're seeing, and in particular the effect on ordinary workers who turned out to be essential, as the senator said, I think that's forcing a massive rethinking of how we support people at the low end of the distribution. And I think also, to the senator's point, the fact that the federal government has responded so slowly and so ineffectively is really making many business leaders aware that a healthy market, a healthy capitalist system requires a strong, transparent, responsive government. And really re-evaluating the balance between the free market and government in our current system.

ADAM SHAPIRO: Professor, it's Adam Shapiro. I'm curious, one of the things we hear about is raising incomes-- whether it's a $15 minimum wage or more, as the senator suggested-- for those at the lower end of the income spectrum. What kind of impact would that have, though, on the original thesis that you were talking about, which is climate change?

REBECCA HENDERSON: I think it's actually a really important first step towards dealing with climate change. I believe climate change is a potentially catastrophic risk to our entire economy. I think we need some kind of regulation or price for carbon pollution so that people can't throw it out the window and impose massive costs on those around them. But I think advocating that right now, when so many people are struggling, is not good politics. It's not good manners.

I think we must deal with our rising inequality. We must deal with the health of the people who struggle, because that's how we're going to help build their support for also dealing with climate change. One of the horrible things here is that climate change is going to hit the least disadvantaged first and hardest. There's a wonderful map of where climate change will really hurt people, and really reduce economic growth, and it's all in the South and the Southeast. Because that's where it's going to get hottest first. That's where there are a huge number of vulnerable populations. We need to put a strong safety net under them, and then deal with climate change as well.

JULIE HYMAN: Rebecca, so this goes to the idea of stakeholder capitalism. That companies need to consider not just profits and their shareholders, but the broader community, including their employees. Some companies-- it's been sort of piecemeal, but some companies during this have stepped up with various worker protections. But of course, there is that shareholder mandate. Do you think that there will be a broader movement to change the legal proxy of companies so that they can broaden it out? I wonder if companies-- there is this tradition that companies feel constrained by that need to maximize shareholder returns.

REBECCA HENDERSON: So I don't in fact think we should change the rules around corporate governance. I'm on the board of one Fortune 200 company and an S&P 500. I'm a proud capitalist. I think firms should absolutely be returning money to their investors. And I worry that if we go to some kind of mumble-mumble "well, you're responsible to all your stakeholders," they'll be responsible to none.

I do believe, however, that companies are still on the hook. I think that you can address the needs of our society and make money in many situations. And that when you start looking for those opportunities, they're there. That there are opportunities to build trust and resilience, to cut costs, to move into entirely new markets.

I spent the first 20 years of my life as the Eastman Kodak Professor at MIT. I think the world faces a Kodak moment. That we've managed our firms as if someone else would take care of people at the bottom of the income distribution. Someone else would fix problems like climate change.

We don't have someone else. So business needs to step up as much as they can. Responding to these challenges is a huge source of opportunity, but that will not be enough.

Rather than trying to get out from under investors, I think it's super important to think about the broader system. To work with governments to get the rules changed so firms can make money by doing the right thing, and you don't have the temptation to force wages down to the very bottom, and not give sick pay, and throw carbon pollution out the window. I think it's super important the business become a partner with government to set the rules so that when you push for making money, which is your duty, you're not causing enormous harm.

That's how I think of this. I think the governance issue is a red herring. We could argue about the nuance. I mean, maybe we should slow down activists. I think there should be better measurement of corporations. I think ESG measures are super important as a way of telling investors that firms are investing in the long term and taking advantage of these opportunities. But I'm not in favor of a wholesale "throw investors out the window." That seems to me a real mistake.

JULIE HYMAN: Right. Well, we can read more about all of this in your book. It's called "Reimagining Capitalism in a World on Fire." Rebecca Henderson is a professor at the Harvard Business School. Thank you so much, Rebecca. I appreciate it.