The EconomistNovember 30th 2019 Business 65R
einventing capitalismis all the
rage. The British Academy, a scholarly
body, issued a provocative report in 2018
arguing for the replacement of profit-
focused shareholder capitalism with a
system in which corporations embrace
social purpose. A follow-up manifesto
published on November 27th tries to
explain how to do this. But fixing capi-
talism is easier said than done.
The report lays out eight principles to
guide implementation of corporate
purpose. These range from changing
laws and regulations to improving met-
rics and governance. Some are sensible.
Establishing common standards for
measuring social impact would be a vast
improvement over the current hotch-
potch of competing (and often mis-
leading) measures of how firms fare on
environmental, social and governance
matters. Ideas for reforming corporate
governance, including improving board
accountability, are useful.
Some ideas are problematic or down-right barmy. The report makes the ex-
traordinary claim that “ownership does
not relate to the assets of a firm but to its
purposes”. The experts insist that every
company must by law have a purpose
“that is not solely about profit”. So would
strategies that maximised profits be-
come illegal, unless they also solved
poverty or climate change? And which of
those goals would the purpose police
deem more worthwhile? There is only
passing mention of the sorts of trade-offs
that bosses must make between the
competing claims of rival stakeholders.
The report is heavy on “should do”
recommendations and light on incen-
tives needed to achieve those goals,
notes Luigi Zingales of the University of
Chicago. He argues that forcing firms to
have a social purpose is an unjustifiable
infringement of freedom. Making bosses
come up with cuddly corporate-purpose
statements is likely to produce a swarm
of platitudes.
The report notes that the corporate
purpose of Novo Nordisk, a Danish drugs
firm, is to “drive change to defeat diabe-
tes and other serious chronic diseases”.
The Academy applauds the firm’s use of
the Future-Fit Business Benchmark, a
tool for assessing governance. Sadly,
these virtues did not prevent it from
charging outrageous prices for its insulin
in America, leading to lawsuits and
congressional inquiries. The firm denies
wrongdoing. In September it responded
to public outrage by offering cheaper
insulin to American diabetics—but only
after Eli Lilly and Sanofi, rival drugs
giants, had done so first.
The academy’s clear-headed first
report asked important questions about
the role of business in society. Its mud-
dled follow-up (which Mr Zingales de-
scribes as “something in between policy
prescription and a self-help book”)
seems destined to end up as a doorstop.On purpose
Companies and societyNEW YORK
A new report urges bosses to embrace “purposeful” businessCapitalism has its criticsT
he boss of Novartis is on a buying
spree. Vas Narasimhan has been shop-
ping for new medicines that will reinvent
his drug company. His aim is to turn a
stodgy European conglomerate into a cut-
ting-edge pharmaceuticals firm by declut-
tering it of unwanted assets and placing big
bets on advanced medicines. These are
more precise in the way they work and are
likely to play an increasing role in health
care in the future. By shuffling the deck, Mr
Narasimhan says he is focusing on “trans-
formative innovation”. All bosses of
pharma firms like to boast about that kind
of thing. Nonetheless, there is substance to
the changes afoot at Novartis.
The latest acquisition, announced on
November 24th, of the Medicines Com-
pany for $9.7bn, brings with it a promising
cardiac drug that targets bad cholesterol,
and which can be given in only two annual
shots. In less than two years at the helm, Mr
Narasimhan has also snapped up an eye
drug from Takeda for up to $5.3bn, Endo-
cyte, a small biopharma firm, for $2.1bn,
and AveXis, a gene-therapy firm, for
$8.7bn. He has boasted about having a
pipeline of 25 blockbuster drugs. If they all
come good it would be remarkable.
Out has gone the firm’s stake in a joint
consumer health-care venture with gsk, a
British pharma firm, for $13bn. Alcon, its
eye-care division, has been spun off into a
separately traded company.
Pharma firms have been slow to adopt
the digital transformations that have
brought innovation (and disruption) to fi-
nance, shopping, banking and airlines. The
new Novartis is more intent than rival drug
firms on using big data and digital technol-
ogies to improve productivity and offer
new services. If it can harness big data, the
firm could become more adept at drug de-
velopment. This would, for example, allow
Novartis to hone the way it runs clinical
trials. It could also allow the firm to identi-
fy subgroups of patients within sufferers
from diseases such as multiple sclerosis,
who will respond better to particular
drugs, significantly lowering the cost of
treatment. The firm is also opening digital
health labs, including one in San Francis-
co, to tap into start-ups in the health-tech-
nology field.
Even as it tries to reshape itself for the
next era of medicine, Novartis still faces
some criticisms familiar in the drug indus-
try. One is high prices. Its gene-therapy
drug, Zolgensma, is expected to cure spinal
muscular atrophy, but costs $2.1m per
treatment in America. Novartis has also
been sharply admonished by regulators
and lawmakers for being slow to reveal that
falsified data were used to gain approval for
the drug. The firm says it was standard pro-
cedure to investigate before informing au-
thorities. The dodgy data seem to have no
bearing on the safety or efficacy of the drug.
When it comes to the new heart drug Mr
Narasimhan has bought, he will have lesspricing power than with Zolgensma. Al-
though the medicine may be better than its
rivals, the market is crowded with similar
drugs that are not selling well. But while its
transformation is under way at least No-
vartis, like its rivals, can rely on a booming
Chinese market, where the government is
now paying reasonable prices for foreign
drugs. Novartis talks of doubling sales in
Asia over the next five years. Investors who
are worried about the high price paid for
the Medicines Company can take heart. 7Transforming a pharma conglomerate
Novartis
Affair of the heart