‘The founder of Richer Sounds is one of the finest entrepreneurs we have.’ Archie Norman, chairman of Marks & Spencer
Capitalism has lost its way. Every week brings fresh news stories about businesses exploiting their staff, avoiding their taxes, and ripping off their customers. Every week, public anger at the system grows. Now, one of Britain’s foremost entrepreneurs intervenes to make the case for putting business back firmly in the service of society, and setting out on a new path to a kinder, fairer form of capitalism.
Drawing on four decades of hands-on management experience, the founder of Richer Sounds argues that ethically run businesses are invariably more efficient, more motivated and more innovative than those that care only about the bottom line. He uncovers the simple tools that the best leaders use to make their businesses fair, revealing how others can follow suit. And he also delves into the big questions that modern capitalism has to answer if it is to survive and to thrive. When should – and shouldn’t – the state intervene in the workings of commercial enterprises? What does business as a whole owe back to the wider community? Is the relationship between leaders of big corporations and politicians too cosy, and, if so, what is to be done about it?
At heart, The Ethical Capitalist is a plea for a new sense of moral purpose in business. If that takes hold, Julian Richer believes, capitalism might just be saved from itself.
Julian Richer established Richer Sounds in 1978. His business now turns over in excess of £200 million a year, and Richer Sounds has won the prestigious Which? Best Retailer award (2010, 2011 and 2015). In 2011 Richer Sounds was granted a Royal Warrant by HRH The Prince of Wales for the supply of consumer electronic products to the Royal Household. The first shop to be opened, near London Bridge, has for over 20 years been listed in Guinness World Records as achieving the highest sales per square foot of any retail outlet in the world. Fifteen per cent of the company’s profits are donated to charitable causes (over 400 of them in 2017). In addition to his commercial activities, Julian Richer is the founder and a trustee of Acts 435, set up to help those in need, and in 2013 he established ASB Help, which works with victims of anti-social behaviour. He lives in Yorkshire.
Also by Julian Richer
The Richer Way
Richer on Leadership
To my wife Rosie
I’M VERY AWARE that anyone who writes a book with the word ‘ethical’ in the title is asking for trouble. So let me admit at the outset that I am deeply flawed!
I’m also aware that it must seem contradictory for me to be critical of many aspects of capitalism when I myself have done so well out of it.
But I do believe there are better ways of doing things, and I hope my own shortcomings don’t get in the way of letting me put across views that I strongly hold.
WITH MORE THAN forty enjoyable and challenging years in business under my belt, I am proud to call myself an entrepreneur. But as I look around I am increasingly angered by what I see elsewhere: disreputable people (mostly men) running their companies in a way that involves taking as much as they can from society and then sneaking their profits out of the country. No doubt they think they’re clever.
I’d like to think that while they are abhorrent, they are also in a minority. Nevertheless they grab the headlines and give other entrepreneurs and traders a bad name. Furthermore, their activities often seem to be treated – and forgiven – as though they are an inevitable by-product of the capitalist way of doing things.
I don’t accept this. In my view it’s possible to run a company both successfully and ethically. In fact, I’d go further. My own experiences in the business world suggest that an ethical approach, far from being a potential barrier to profits, is actually the secret to success.
My retail chain, Richer Sounds, has survived and thrived for more than forty years, through three recessions and the onslaught of internet selling. We may not be a huge global company, but we know what it means to fight for every pound in a highly competitive marketplace that has gone through immense technological change. In the early 1980s, when we sold the hi-fi separates we were so passionate about, we could not have imagined the way people acquire and listen to music these days (nor the size of TV screens now!). The success and resilience of Richer Sounds has only been possible, I believe, because we try to act in an ethical way.
What do I mean by ethical? I mean treating staff, customers and suppliers honestly, openly and respectfully. I mean taking responsibility for our actions, owning up when things go wrong and setting out to put them right. I mean seeing ourselves as an integral part of society and paying our dues – and taxes – accordingly. By following this approach I believe we create a virtuous circle for ourselves: not only can we sleep better at night, but a fair and honest approach to customers and staff leads to a huge competitive advantage that in turn reinforces the need to be fair and honest.
To my mind, ethical business is about two interrelated questions. The first is, what are the whys and wherefores of operating an ethical organisation? The second is, how can we, as a society, ensure that capitalism more generally is ethically controlled?
Let me say at the outset that I am an absolute believer in capitalism. I think it is the only economic system humans have so far come up with that offers the real promise of personal prosperity and well-being. However, I am also deeply aware of its shortcomings. People sometimes argue that either you are a capitalist, in which case you accept its drawbacks, or you’re not. I don’t believe that at all.
MY INVOLVEMENT IN the world of business began early on. When I was fourteen, I bought a Bang & Olufsen turntable for £10, cleaned it up and promptly sold it for £22. The profit I made – equal to a term’s pocket money in 1973 – was enough to get me hooked. By the time I was seventeen I was hiring a large white Mercedes every Tuesday and Thursday afternoon to ferry me around Bristol as I bought up and then resold stereos that local shops had taken in part-exchange during the hi-fi separates boom of the early 1970s. From there it was only a short step to getting a hi-fi shop of my own, just two years later when I was nineteen, in tiny premises at London Bridge.
Arguably, my first encounter with the world of ethical business came even earlier than my first business deal. As a young child I listened as my parents recalled how they met when they were both trainee managers at the Kilburn branch of Marks and Spencer and as they described what the company had been like to work for. In those days, they explained, M & S was a very paternalistic organisation. When the chairman visited a branch he might have arrived in a chauffeur-driven limousine but the first thing he did was to check the staff loos for cleanliness and the canteen for the quality of the hot food on offer. My parents always talked about him with respect. I therefore grew up with the idea that a company should care about its employees and that if it did the employees in turn would be loyal to the company. Later, when I went to Clifton College, I was to be hugely inspired by my housemaster Ernest Polack, whose idea of a holiday was to go to South Africa to demonstrate against apartheid (and to get beaten up for his troubles). He instilled in me a passionate belief in equality and human rights, just as many years later my wife was to inspire me with her deeply held Christian beliefs and values.
A love of buying and selling has stayed with me ever since I sold that first turntable. And there’s no doubt that the profit motive has, too. I’ve always been driven by a desire to make money, especially in the early years. But the notion that how you treat people is central to how you conduct business stayed with me as I built my company and learnt from my mistakes.
What really transformed my thinking was reading Tom Peters’ and Robert Waterman’s classic business text In Search of Excellence, which I first encountered over thirty years ago. The authors identified various factors that they believed made companies successful. Key among them were how they treated their employees and customers (‘Far too many managers have lost sight of the basics, in our opinion,’ they argued; ‘quick action, service to customers, practical innovation, and the fact that you can’t get any of these without virtually everyone’s commitment’). I began to apply In Search of Excellence ideas to my own business and found they really produced results. I also got to test them in a very different company environment in the early 1990s when Archie Norman, newly arrived at Asda, invited me to introduce my approach in their superstores. Asda had a completely different staff demographic from our own, and was a far larger enterprise, with 75,000 employees at the time, but we proved that the things that Richer Sounds did to motivate colleagues and boost productivity worked there, too. People are basically the same wherever they’re working – old, young, female, male, part-time, full-time: they all want to be valued and treated well and they all have a lot to contribute, given the chance.
It’s a simple formula. The key to increased sales is good value products alongside good customer service, and the key to the latter is highly motivated, highly trained staff (or, rather, colleagues, as we refer to them at Richer Sounds). I set out my principles in a book, The Richer Way, showing how they worked for us, and arguing that they could (and, I absolutely believe, still can, twenty-five years later) be applied in any organisation, including those in the public sector.
Of course businesses need to be profitable, or else they will go bust and jobs will be lost. But the pursuit of profit before everything is not the key to business success. If profits are only gained by paying employees and suppliers the bare minimum and giving customers a bad deal, in the long run the business won’t thrive. Customers, and suppliers, will have no loyalty to the brand and will just as quickly turn to a competitor. Employees who are badly treated will never give their best: productivity will be poor and profits will suffer, and the good people will leave.
By the same token, the pursuit of high ethical standards serves to make a business stronger and more competitive. It should not therefore be treated as a nice optional add-on when times are good. It should be the central core of the enterprise, the motivating force that will help pull it through when times are bad.
In calling this book The Ethical Capitalist, I recognise that, on the whole, business people don’t like to be called capitalists. The terms ‘entrepreneurs’ or ‘wealth creators’ sound so much nicer and more admirable. But you can’t get away from the fact that it is the capitalist set-up in which we operate that enables us to make our money.
For many, an economic system based on the private ownership of the means of production and the private profit that arises from this ownership is inherently wrong. It places an emphasis on what people can afford rather than what they necessarily need. And because money and power are linked, it gives disproportionate influence to the rich and can leave the poor without a voice. I completely acknowledge these dangers, but I also believe that capitalism has benefits that can go well beyond simply enriching owners and shareholders. For a start, it encourages hard work. I didn’t make much effort at school because I didn’t see any advantage in it. The minute I had my first shop, at nineteen, I was like a grey-hound out of the trap. There was nothing stopping me – I was working seven days a week and loving it. Since then, I’ve learned to pace myself and achieve a far better work-life balance, but entrepreneurial energy is a real force. Anyone running their own business knows how motivating it is.
That desire to succeed and make money spurs people to source, produce and sell the goods and services that others want to buy, and they will go to the nth degree to achieve this. They will also constantly innovate and make improvements (assuming that the market is a healthy one and not rigged). Admittedly, they profit from this. But consumers gain, too.
By contrast, in societies where free enterprise is stifled, where the system is controlled by the state, or where markets are dominated by corrupt monopolies or oligopolies, the consumer has tended to suffer. Choice dwindles. The quality of products and services sinks lower and lower.
The desire to make money leads to job creation. You can earn a certain amount as an individual maker of widgets, but you will make more if you can employ others to produce them for you. That shift up from sole trader to employer makes all the difference to profitability. And once you become part of a manufacturing or supply chain you indirectly support a whole range of other jobs, from distributors to accountants. You also become a significant contributor to the country as a whole, through the taxes that you and your staff should pay (a topic to which I will return later). After all, it’s the taxes that private concerns and employees hand over to the government that fund nurses, firefighters and teachers, and others in the vital public service sector.
To my mind, perhaps the best illustration of the benefits of capitalism is to see the impact it has on local economies and communities. A high street crammed with shops and businesses is a bustling, vibrant place. When those enterprises go, and their premises are boarded up, people talk about an area having no ‘life’ to it. It quickly goes into a downward spiral. Trade and business can create ‘life’ – busy-ness, variety, purpose.
I’ve focused on the profit motive, but I think it would be wrong to say that it’s the only motive to be found in capitalism. Business leaders are driven by a complex range of impulses. The desire to make money is certainly one. But there is also the satisfaction of being their own boss, of providing jobs, of having a good reputation, of creating attractive products or delivering a professional service. These are all strong drivers. The same goes for their employees. In a good company, what motivates people to turn up for work each day is much more than the amount in their wage packet. Their job satisfaction is much more likely to derive from getting on well with their colleagues, feeling part of a team and seeing customers happy.
So capitalism can work in many ways that are good for people and for society. But I accept that, as with any political and economic system – particularly one founded on individual profit and, dare I say it, greed – it also poses challenges and threats.
At its worst, it leads to the exploitation of employees, who can end up being treated as just another factor of production. Too many businesses today have not progressed much beyond the nineteenth-century mill owners who saw their employees merely as ‘hands’. Years of pressure, mostly by trades unions, may have resulted in protection and rights for workers in developed countries, but the worst capitalists will always try to find ways round that protection.
Capitalism can also lead to huge social inequality. Karl Marx observed 150 years ago: ‘Accumulation of wealth at one pole is, … at the same time, accumulation of misery … at the opposite pole.’ Some argue that wealth creation at one end automatically leads to wealth creation at the other end – the so-called ‘trickle-down effect’. The evidence, though, doesn’t support this. In fact what seems to happen is that, unless controlled in some way, wealth becomes ever more concentrated in the hands of a small elite who proceed to get richer and richer, while the remainder of the population is left ever further behind. In the UK wealth inequality has been growing steadily since the 1980s. Today, the richest 10 per cent of the population have around 30 per cent of the nation’s income, while the poorest 10 per cent get around 1 per cent share. The distribution of wealth is even more unequal: at present more than half the personal wealth in the UK is held by only 10 per cent of households. And the differential is getting worse.
Given that we are all very different from one another, a degree of inequality is inevitable. It is also arguably desirable. Certainly, I would not have worked so hard to create my business if I had not started off with very little money and been intent on having more. Most of us put in the hours in order to improve life for ourselves and our family. We want to ‘get on’. But if people are locked into poverty, and see opportunities concentrated in the hands of a small elite, the very real danger is that they will give up. Why should they try to improve their lot if it’s so hard to do so? And why should they support a society that is doing so little to support them? The point that Thomas Piketty makes in his seminal book Capital in the Twenty-first Century – that increasing inequalities in wealth cause social and economic instability – is, to my mind, a thoroughly convincing one.
Once this happens, the lives of the rich and the poor become self-reinforcing. The poor become powerless, trapped in a vicious circle of deprivation. The rich become richer, not least because their increasing power and influence allows them to buy such hefty privileges as – not least – exemption from taxation. As I discuss later, wealth and political clout are intimately connected.
The irony is that social inequality is actually bad for capitalism. For businesses to thrive, we need people to be in secure jobs and decent homes, able to spend confidently. They should not be condemned to a low-wage economy such as the one we have in the UK, where the Child Poverty Action Group talks of one in four children growing up in poverty, where food-banks have become ever more necessary, and where, according to the National Audit Office, there was a 60 per cent increase in the number of homeless households between 2011 and 2016. In a healthy economy, money needs to be widely distributed and circulating, not siphoned off to unproductive tax havens. Furthermore, social inequality is expensive. All the evidence suggests that it creates problems in society that are enormously expensive to fix. A country such as the UK, which has a relatively wide gap between rich and poor, also has higher levels of crime, obesity, illiteracy and other health and social problems.
The father of capitalism, the economist Adam Smith, argued that what drives business is self-interest. ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,’ he famously wrote in The Wealth of Nations, ‘but from their regard to their own interest.’
But to think that that’s where Adam Smith’s thinking began and ended is to misunderstand his world view. ‘No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable,’ he wrote in the same work. Elsewhere he went even further: ‘And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections,’ he argued in The Theory of Moral Sentiments, ‘constitutes the perfection of human nature.’ In other words, the father of capitalism recognised that it was about more than profit, growth and wealth. Political economy, to him, had ‘two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state of commonwealth with a revenue sufficient for the public services’. In other words, an ethical dimension to capitalism is not an optional addition – it’s an essential aspect of it.
If proof were needed of this basic fact, capitalism’s most recent global crisis – the 2008 banking melt-down – provides a textbook example. At bottom, this was not about a failure of a particular economic doctrine or approach but of ethics. In the case of the US sub-prime mortgage scandal bankers acted out of greed, and with no fear of being penalised, to lend money to people who couldn’t afford the repayments. Even if you argue that this was a risky rather than a dishonest practice, what happened next was unquestionably unscrupulous, because those bad loans were then securitised and sold on with higher credit ratings than they warranted. The cause of the crash, in other words, was deceit.
Similarly in the UK, investment bankers playing the markets with insanely complicated betting schemes took huge risks with other people’s money, without adequately explaining what those risks might be. The whole process was driven by a lack of responsibility, the bankers believing that they were entitled to enormous bonuses when they made money, but not liable to any penalty if their risks did not pay off. In this respect, at least, they were proved right: the UK as a whole paid for the banks’ mistakes and had to endure a long period of austerity, while people in the investment banking sector went back to happily receiving massive bonuses and avoiding any criminal penalties.
Once it is accepted that ethics is central to the proper functioning of capitalism – and that a just capitalism will in turn lead to a just society – many other recent developments should be ringing alarm bells. I’ve been angered to see how some businesses have put their ingenuity and energy into a race to the bottom in terms of employee pay and conditions. Various companies have introduced zero-hours contracts, or have exploited self-employed status by claiming that the people who work for them are not technically their employees, and so do not qualify for sick or holiday pay. Some have been paying their employees at rates well below the minimum wage.
And there are further challenges on the horizon, too. Back in the 1960s, there was a utopian view that greater mechanisation and the increasing use of robots would be a great thing for society – people would be relieved of the burden of boring, repetitive jobs and would be able to enjoy fulfilling leisure time. Now we know that people ‘relieved’ of their jobs are often condemned to extreme poverty and unemployment. If that increasingly becomes the case, not only will we be wasting lives but we’ll be undermining the very prosperity that the automation is supposed to lead to. There’s a story that while one of Henry Ford II’s managers was showing Walter Reuther, leader of the US automobile workers’ union, round a new, highly automated factory in 1953 he asked, ‘How are you going to get these robots to pay your union dues?’ ‘How are you going to get them to buy your cars?’ was Reuther’s response.
beliefs