It may be that we are living a defining moment for the future of capitalism and for humanity. For the last 200 years entrepreneurial prowess enabled by financial capital has powered a long surge of economic growth. Over the major innovation cycles, the capitalist system has been resilient enough to absorb the effects of the crashes caused by pure speculation and turn them to its advantage. Production capital took the lead over financial capital and real value over paper value, as Carolta Perez has so brilliantly demonstrated.

Fast forward to today, and the picture is not so happy. Financial capital is in the driving seat. Eight years on, the world is tentatively emerging from a financial crisis that almost broke the global economy. Even though we are back to a semblance of stability, a range of unresolved issues – sky-high government debt, a still-fragile financial system, stagnant productivity, increasing levels of inequality, latent currency crises, slowing growth in emerging markets, high volatility in stock and commodity markets and geo-political instability and extremism – preclude any easy return to sustained economic growth.

There are certainly many causes for concern. A striking features of today’s fragile world situation is the inability to channel an abundance of cheap financial capital into productive use by companies, economies and states. Some prominent economists predict a new period of secular stagnation as the last great phase of innovation-fuelled growth (as they see it) dries up. With attention fixed on the obsessive search for the next high-tech “unicorn”, vital investment is lacking in “Main Street” companies that could fuel precious growth and employment.

Most large companies seem to have lost the taste for entrepreneurship, their CEOs preferring to focus on using technology to maximize profit from existing businesses. They are too often governed by the interests of shareholders who regard corporations as speculative investment opportunities rather than human communities for which true owners would feel ties of responsibility and commitment. And while capital markets celebrate short-term results over long-term corporate development, governments seem to have only one response to the urgent new challenges of our time: overregulation, resulting in crippling micromanagement and microregulation of domains that are evolving at breakneck speed, frequently aggravating the problems the regulations attempted to resolve. It is questionable, for example, whether many thousands of pages of regulations have enhanced the banks’ ability to carry out their core mission of funding the real economy of goods and services for real human beings.

The entrepreneurial society

Between discredited financial capitalism on one side and ever more burdensome state bureaucracies on the other, can we revive a lost but deeply-rooted human capability – the capability to take ownership of the problems we face, and to accept responsibility for creating our own solutions – that is, create the basis for a properly entrepreneurial society?

Drucker called this a turning point in human history. What we need, he said, was not just an entrepreneurial economy but an “entrepreneurial society in which innovation and entrepreneurship are normal, steady, and continuous”. He saw innovation and entrepreneurship as a life-sustaining activity pervading organizations, the economy and society.

In terms of management, the advent of the entrepreneurial society means above all replacing the rigidities of industrial-age mind-sets, with their command-and-control, top-down orientation. What indications are there that this is happening?

Despite powerful headwinds, green shoots are visible. Agile methods and Scrum are creating space for individuals to self-organize and work in iterative processes; by bringing customer development closer to the marketplace and enabling rapid learning from failure the lean start-up movement has great potential to increase the success rate of new ventures. New business models and value propositions are developed by global teams using web-based tools and communication methods. Design thinking is entering the mainstream as large organizations learn to proceed by prototyping and iteration. Start-up factories, incubation hubs, living laboratories and hotspots for innovation are springing up in cities around the world. Large corporations are devoting serious attention to becoming “ambidextrous”, combining robust exploitation capabilities for existing businesses with new exploration-driven business engines inside and outside their organization. And above all, new generations are legitimizing entrepreneurship and innovation with the enthusiasm and drive of youth.

Managing the transition

Yet start-ups and large corporations can only be part of the story of entrepreneurial reinvention. Making the shift from small to medium-sized business and generating more fast-growing “gazelles” remain major entrepreneurial challenges. Germany has shown the way, its “Mittelstand” encompassing numbers of world leaders or “hidden champions” in highly specialised fields, as demonstrated by Hermann Simon. This entrepreneurial success story has not happened overnight. Many family-owned Mittlestand businesses are exemplars of stewardship in its truest sense, demonstrating long-term commitment to a business and to the employees who are its heart and brain. Are there lessons here for giant corporations and the stock markets they trade on?

While digital technology creates extraordinary opportunities, it also disrupts existing economic, social and physical infrastructures in ways and in time-spans that make the social consequences hard to absorb. Drucker observed long ago that each social problem is a business opportunity in disguise. Social entrepreneurship and social innovation must play their part here. Not all solutions in this field will generate the financial flows to make market-based responses viable. But besides innovative public private partnerships, digital technology could yet enable the emergence of a “sharing economy” for acts of citizenship and mutual support and exchange that is worthy of that name. Together with state agencies combining in a new “Entrepreneurial State”, such institutions may knit together a flexible social web to provide security for the most needy.

The emerging world has embraced the notion that only entrepreneurship can lay the foundations for decent lives and a good society – important, because the challenges are daunting. By 2050 two billion young adults will enter the global workforce. These are the genuine challenges of the world, beside which many of the luxury problems that politicians, trade unions and advocacy groups tussle over in the West pale into insignificance.

For sure, transition into a new settlement that is not yet fully formed is painful and frightening. But it can be shaped by society’s responsible groups, among which management, as Drucker always reminded us, is a leader. Our vision: a new age of innovation and entrepreneurship that brings to bear the energy, the creativity and the “wisdom of the crowds” in a new way – as the practical wisdom of engaged, motivated and ethical individuals; open and critical minds who connect in the real and virtual worlds to understand and solve human problems in novel ways. Entrepreneurship leads us back to the essence of being human – the ability to create something that may not been seen even imagined before. No algorithm can do this. Entrepreneurs, entrepreneurial managers and a new entrepreneurial mind-set may represent our secular opportunity to make the difference between secular stagnation and secular prosperity – as such, a true defining moment for the 21st century.

About the author:

Dr. Richard Straub is founder and president of the Peter Drucker Society Europe and a member of the EFMD Executive Management team.

The agency theory (as conceived by Jensen and Mecking) that spawned the shareholder value model conveys the illusion of a scientific type of approach; it provides a fact based analytical model to make rational investment decisions into corporations with clear indicators providing the basis for current and future performance assessment. It has a built-in logic that seems compelling to the financial services community and to the investors. As Roger Martin would call it: it has progressed from a heuristics approach to an algorithm based model. However, it has become increasingly clear that the approach that has exclusively financial indicators at its core is only reflecting a fraction of the corporate reality. In reality there are multiple factors beyond financial indicators that determine the long term survival and success of corporations. What is worse – the prevailing shareholder value theory had major unintended consequences i.e. a corrupting effect on Boards and their management with obscene and self-serving remuneration schemes. It led into behaviours that are clearly conflicting with the long term prosperity of the enterprise.

Bemoaning the shareholder value philosophy is legitimate but by no means sufficient. We need a similar unifying intellectual foundation like the one that was produced by Jensen and Meckling in their article The Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure. The alternatives that have been bee broadly discussed during the past years appeal to the ethical standards and good intentions of business leaders but have no convincing model which the asset management and investment community might embrace at a large scale – such as the HBR article on Shared Value by Porter and Kramer which is a laudable effort but falls short of providing a compelling model that has a chance to replace the current paradigm. The same is true for the Triple Bottom Line approach – there is no doubt which bottom line gets priority when push comes to shove.

Sumantra Goshal has been working on a landmark article but sadly passed away before he had finished it. It has been finalized by others and published but it is unfortunate that he could not put the final touches and additional thoughts he may have had on his mind into his article Bad Management Theories Are Destroying Good Management Practices. Interestingly though, Michael C. Jensen, one of the authors of the article that changed world of business since 1976 (see above) has published an academic paper in 2001, which regrettably is much less cited that the now infamous Theory of the Firm paper. It is remarkable though that Meckling calls in it for an “enlightened value maximization that would utilize much of stakeholder theory, but accepts maximization of the long run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders (cited from Paul Bernett, Four Ways to Save Capitalism). Maybe this is something to revisit by the research community of Business Schools and by those Economists with a keen interest in what is actually happing in real life, ready to move beyond abstract concepts, formula and aggregates.

On the other hand the sustainability movement has been too much focussing on the pure environmental perspective, which obviously represents key framework conditions for senior management but cannot be seen as a primary purpose of the business. From the Druckerian perspective the creation of a sustainable business based on value creation and the focus on human capital clearly comes first.

There is urgency for a cross-discipline approach as the current situation reflects a resounding failure of management and economic research to deal with the most burning issues of our time and to present viable solutions. What is needed is systemic perspective, not just soliciting and urging the mangers and executives to do good, but finding way of a profound dialogue with investors, asset managers, the financial services community and policy makers. Mangers are in way at the bottom of a chain of command and influence – they cannot implement fundamental changes without the endorsement of their boards and investors.

Hence there is more to do that pointing to corporate management as the culprits of the current unsatisfactory situation. Top economists and top management thinkers should stick their heads together and come up with another grand theory – this time hopefully one that contributes to a paradigm shift that demonstrates the economic benefits of a longer term perspective as a compelling case that even the number crunchers cannot ignore. Such a longer term perspective should create positive outcomes in the fields of investment, innovation and talent development. It should change the behaviour of investors who would take on more of a stewardship role comparable to “real” owners for the business as opposed to placing short term financial bets with strong speculative traits and with little consideration of the long term viability of the business. We have reached a tipping point where we cannot avoid thinking hard about the future. Enlightened self-interest means that businesses assume their role of being the engines of innovation, growth and prosperity. They are at the core of value creation that ultimately provides the glue for functioning societies.

Vienna and Paris, February 7

Note: Moving beyond excessive short-termism will be a theme at the 2014 Global Peter Drucker Forum on Novemer 13 and 14 in Vienna. See http://www.druckerforum.org/