Trust in Capitalism June 22, 2010, 12:33PM EST

Competitive Theory and Business Legitimacy

Michael Porter has argued that business legitimacy has been lost. Charles Green argues that long-term thinking can restore it

Story Tools

The Economist once called Michael Porter the "doyen of living management gurus." Porter is the guru of competitive strategy, the one who told companies that their route to success lay in competing not just against their direct competitors, but against their suppliers and customers as well. A great number of companies have spent the last 20 to 30 years doing just that.

So when Michael Porter says something new, it's worth noting, as with his recent piece for Businessweek.com, "How Big Business Can Regain Legitimacy." The idea of regaining legitimacy implies that legitimacy has been lost, which is precisely Porter's point. And the loss of business' legitimacy is a shame not just for business, but for society at large.

There is no "legitimacy index," and any attempt at mapping something as ephemeral as legitimacy will be fraught with subjectivity. But let me suggest a commonsensical outline. Legitimacy broadly tracks such social phenomena as trust and confidence, heroes vs. villains, and the popularity of going into business as a career choice. By these indicia, the socially perceived legitimacy of business was low in the 1960s, high in the '80s, and is at a nadir now.

Lowest in a Decade

Somewhere in the '90s the tide began to turn. The dot-com meltdown, Big Oil, Long-Term Capital Management, Enron, Hurricane Katrina, Bernie Madoff, and subprime mortgages have all played a role. By January 2009, a major survey showed trust in business at a 10-year low.

In a couple of decades, we went from a President repealing Glass-Steagall to a President firing the chief executive of General Motors; from a doctrinaire laissez-faire Fed Chairman to the SEC suing Goldman Sachs (GS) and the Justice Dept. suing BP (BP). The decline in public trust of business parallels the new adversarial relationship between business and government. This is what Porter means by the decline in legitimacy of business: Businessmen are no longer social heroes, and the political class can no longer be seen to be their friends. A reminder came just last month, with the Senate's passage of a major financial reform bill, despite intense industry lobbying.

Ironically, in the rear-view mirror we can see that Porter himself was partly responsible. Thought leaders have impact. Porter's major impact was describing business itself as an ongoing Hobbesian state of competition—not just between competitors, but between companies and their customers, suppliers, and social institutions. Corporate success is defined as gaining sustainable competitive advantage over all one's competitors. Adversarial relationships in Porter's worldview are simply the Way Things Are.

The Gekko Era

In the '80s, there was a common viewpoint about business' relationship to society. Milton Friedman spoke the economists' version—companies owed no social debt beyond being profitable. Reagan's "government is the problem" was the political version. Porter was the thought leader for business; business' relationship with government and society was one of competition, not of collaboration toward some higher, joint purpose. Hollywood packaged it all into Gordon Gekko—the antihero of Wall Street.

These messages all converged. Business was the source of its own legitimacy. It needed no external endorsement. It would work best when left alone, allowing Darwinian forces to work their magic.

That now seems a long time ago. Society and government are reasserting their controlling rights to business legitimacy. Regulation is back in; the American taxpayer now owns some chunk of American industry and doesn't trust the prior management team. Today's message from the public and government is: We don't trust you, the free lunch is over, and as long as you continue this adversarial competitive mindset, we will continue to deny you legitimacy. It went beyond the Reaganesque complaint about government being the problem. One of Goldman Sachs' defenses in its current litigation is caveat emptor—an argument for the bazaar, but not one for social legitimacy.