Bailout is bad socialism! How to bailout in a Conscious Capitalism manner?

Here it comes again. Whenever there is a sector of the economy suffering from a financial downturn the US government swoops in to bailout the companies in need with public money. This is the worst possible idea.

Using public money for companies that had great profit distributed in previous years, making shareholders wealthier, is nowhere in the capitalism playbook. Adam Smith is likely rolling over in his grave. This feels like an initiative to maintain the fortune of those who received the large profits. Recently, in the beginning of 2020, the World Economic Forum in Davos raised the need for a NEW capitalism: Stakeholders Capitalism. Bailing companies out a crisis like this looks more like a Shareholder Capitalism than anything else, right?

Why shouldn’t these shareholders – ones that received great dividends - jump in to save their own cash cow? The true question is why should they? The US government traditionally jumps in to save them. The funny thing is that the US is maybe a “socialist for the rich” country disguised as a capitalist one. We use socialist tools to save the great capitalists. There is something very wrong with this picture. It is time to end the “Dire Straits - Money For Nothing” bailouts.

What if there was a better way to apply a capitalist approach to these situations? What do these companies have to commit to in order to receive such an amazing sum of money? Like the airlines that have about $50 billion on their radar?

Well, instead of just blaming the bad solution, let’s take a more constructive approach to the idea and improve upon it. What if we used a more conscious approach to such a situation applying the tools provided by capitalism? It is time for building together as opposed to destroying the previous ideas and bringing new one to the table. Left of right alone won’t take us forward. We all understand that the current economic environment is somehow an exception to the rule. At some point in the near future we will go back to the business volume we had before; at least, it’s what we all expect.

So, with that in mind, why doesn’t the government offer a more capitalistic approach instead of this crazy socialist bailout solution? We can even say that Trump is a socialist for the few, of course. What would a capitalist approach look like? In a capitalistic system, we do not agree on welfare for business, it might be applicable for a short time for individuals, but it should not be applicable for businesses.

Shouldn’t the government offer a different deal? Companies who are interested in financial support via bailout should consider an exchange for something that has value. Perhaps receive bailout money in exchange for company’s shares, for instance We would just need to define a fair share value. The question now is: “What is that fair share value?” Here is some food for thought: let’s go back a certain number of months prior to the crisis (perhaps assume 4 months prior), look at the company’s share price and use this value as the reference for the exchange for government money.

If the company needs financial bailout, it should not be for free anymore. We would create a fair exchange for it. It would mean that:

·       We would exchange company’s ownership for money like a real capitalist transaction.

·       We would consider the value of the shares at that specific date as collateral and in exchange for bailout money.

In case the company did not manage to pay back the public money, a specific “bailout agency” would own the business.

But let’s me sure we come out with a good plan for all, because we do not want a gigantic government agency owning failing businesses or abandoned businesses.

·       The company and its shareholders would have up to 5 years to recover their ownership.

·       The buyback of the shares could follow certain rules such as minimum value would be the bailout value paid. Equally, a maximum could include a 50% of what the shares appreciated from the bailout purchase price.

·       There would be incentives for the shareholders and company to get back on track and create value to save the organization.

If shareholders made good profits in the past, that would be an opportunity to bring the business back on track to make good profits again.

We could always add a few more incentives or conditions to this plan, such as the top management tier would have to reduce its compensation by 50% until all shares have been bought back. We could add a participation for all ranks from 50% at the top to 10% at the bottom and distribute throughout the ranks. Here is an invitation to rethink how we solve problems. We do not need patronizing large organizations; we need to come up with better solutions.

This is just one example that utilitarian solutions no longer have a place in our V.U.C.A. (Volatile, Uncertain, Complex and Ambiguous) world. We don't need more millionaires; we need more people living better. We need to look at a more systemic approach to solve our problems. This approach will allow us, as a system, to prosper in a more just and equal-opportunity manner.

Please join this conversation and add your suggestions to bring solutions with new perspectives to our current and old problems.

Thomas Eckschmidt

Co-founder & CEO of Conscious Business Journey

Co-founder of conscious capitalism movement in Brazil

Co-author of Conscious Capitalism Field Guide (Harvard Business Review Press)