"
"Picture a business built on love and care rather than stress and fear, whose team members are passionate and committed to their work…
"Think of a business that cares profoundly about the well-being of its customers, seeing them not as consumers but as flesh-and-blood human beings whom it is privileged to serve…
"Envision a business that embraces outsiders as insiders, inviting its suppliers into the family circle and treating them with the same love and care it showers on its customers and team members.
"Imagine a business that is a committed and caring citizen of every community it inhabits, elevating its civic life and contributing in multiple ways to its betterment….
"Imagine a business that exercises great care in whom it hires, where hardly anyone ever leaves once he or she joins...
"See in your mind’s eye a business that chooses and promotes leaders because of their wisdom and capacity for love and care…
"Imagine a business that exists in a virtuous cycle of multifaceted value creation… while also delivering superior financial results year after year, decade after decade…"
Unreal?
Not so, say John Mackey, Co-CEO of Whole Foods Markets [WFM] and co-founder of the conscious capitalism movement and Raj Sisodia in their brilliant new book, Conscious Capitalism: Liberating the Heroic Spirit of Business (Harvard Business Review Press, January 2013): a great start to the new year!
Such businesses, say Mackey and Sisodia—"suffused with higher purpose, leavened with authentic caring, influential and inspirational, egalitarian and committed to excellence, trustworthy and transparent, admired and emulated, loved and respected"—are not imaginary entities in some fictional utopia. The prime example that they offer is of course Whole Foods itself, but there are other firms which also implement the principles. “They exist in the real world, by the dozens today but soon to be by the hundreds and thousands.”
A paradigm shift in management
The book is a hymn of praise to the emerging new paradigm of management as well as a guide on how to implement it. The book isn’t just talking about a few management techniques or tools. It’s presenting a different way of thinking and speaking and acting in the workplace.
Mackey and Sisodia are of course not alone in arguing that a shift in the management paradigm is under way. They join other thought leaders, including Alan W. Brown, John Seely Brown, Rod Collins, Bill George, Ranjay Gulati, John Hagel, Gary Hamel, Umair Haque, Vlatka Hlupic, Roger Martin, Lisa Earle McLeod, Vineet Nayar, Franz Roeoesli, Fred Reichheld and Jeff Sutherland.
Mackey and Sisodia call their particular flavor of the paradigm shift “conscious capitalism”. Other writers use different terms, including “customer capitalism”, “stakeholder capitalism”, “management 2.0”, “reorganizing for resilience”, “the power of pull”, “employees first”, the “net promoter system”, “wiki-management” or “radical management”.
Whatever it is called, it is radically different from the management mindset of most of the Global 1000, from the management practices usually advocated by leading consulting and private equity firms, and from the management practices taught in the majority of courses in today’s business schools and celebrated endlessly in some management journals.
The shift in management paradigm is as transformational as the shift from the medieval view that the sun revolves around the earth to the view that earth and the other planets revolve around the sun. It is a fundamental transition in world-view. Once you make this shift, everything is different.
The book cites as examples of companies today that exemplify the new management paradigm: Whole Foods Market [WFM], The Container Store, Patagonia, Eaton [ETN], the Tata Group, Google [GOOG], Panera Bread [PNRA], Southwest Airlines [LUV], Bright Horizons, Starbucks [SBUX], UPS [UPS], Costco [COST], Wegmans, REI, Twitter, and POSCO [PKX]. In his foreword, Bill George throws the net even wider and includes: IBM, Apple, Novartis, Wells Fargo, and General Mills.
Whether all of these firms now exhibit all of the characteristics of conscious capitalism deserves further examination. Even in Whole Foods itself, of which I’m the biggest fan, performance varies considerably from store to store. And let's be honest: it’s as easy to find a disengaged checkout clerk there as it is in any supermarket (why no self-checkouts?)
And IBM? It’s a stretch to suggest that IBM is “suffused with higher purpose” and “leavened with authentic caring”. Or “egalitarian” and “a business built on love”? Give me a break! Although parts of IBM implement some of what the book is talking about, much of IBM is firmly entrenched in management practices aimed at extracting money from customers.
But most of the firms that Mackey and Sisodia cite are at least aspiring to move towards the principles of the new management paradigm that the authors articulate. And as the superior financial results of firms that genuinely practice the new management paradigm become apparent, its ultimate triumph is inevitable.
The ten-year share price of most of the publicly owned companies cited by the authors are doing significantly better than the S&P 500.
S&P 500 +51%
Whole Foods +250%
Eaton Corporation +182%
Google +740%
Southwest Airlines -30%
Starbucks +420%
UPS +20%
Costco +260%
POSCO +230%
REI is consumer cooperative that appears to be profitable. We don't know the profitability of the firms that are privately owned: Wegmans, The Container Store, Patagonia, the Tata Group and Twitter. It seems that privately owned firms find it easier to practice conscious capitalism than those subjected to the pressures of the stock market.
Bright Horizons is a widely admired child care provider. It was acquired by a private equity firm in 2008. Given the explicit objective of private equity (i.e. making more money quickly), one has to wonder whether love and trust in that firm will survive the “turnaround”.
Strengths of the book
The book is nevertheless a welcome addition to the growing literature on the new management paradigm. It is particularly strong on:
- A brilliant exposition of the values and thought-patterns of the new management paradigm.
- A devastating critique of the current dominant management paradigm
- New insights on how to weave all the stakeholders, the community and the environment into the management of a firm that still makes a lot of money.
- How the new paradigm differs from mere tweaks or facelifts to the current paradigm, such as corporate and social responsibility or Michael Porter’s shared value.
Capitalism has been its own worst enemy
The book accepts harsh criticism of the current practices of capitalism: “exploiting workers, cheating consumers, causing inequality by benefiting the rich but not the poor, homogenizing society, fragmenting communities, and destroying the environment. Entrepreneurs and other businesspeople are accused of being motivated primarily by selfishness and greed.” Mackey and Sisodia agree:
- Businesspeople have allowed the ethical basis of free-enterprise capitalism to be hijacked intellectually by economists and critics who have foisted on it a narrow, self-serving, and inaccurate identity devoid of its inherent ethical justification…
- Too many businesses have operated with a low level of consciousness about their true purpose and overall impact on the world.
- In recent years, maximization of profits has taken root in academia as well as among business leaders.
- Crony capitalism is restricting competition in favor of politically well-connected businesses.
The book argues that the heart of the problem is that businesses today view their purpose as profit maximization and treat all participants in the system as means to that end. These firms may succeed in creating material prosperity in the short term, but the resultant price tag of long-term systemic problems is increasingly unacceptable and unaffordable, both for the firm itself and for society. Shareholder capitalism simply doesn’t work, even on its own terms.
Mackey and Sisodia note that symptoms of dysfunction and disaffection abound in the corporate world.
- The average level of engagement that American team members have with their work has remained at 30 percent or less for the past ten years, and almost as many people are hostile to their employers.
- Top executives at the helm of many major corporations have rigged the game to enrich themselves at the expense of the company and its stakeholders. According to the Institute for Policy Studies, the ratio between CEO pay and average pay was 42: 1 in 1980, 107: 1 in 1990, and 525: 1 in 2000. It has fluctuated in recent years, standing at 325: 1 in 2010.
- Crony capitalists and governments have become locked in an unholy embrace, elevating the narrow, self-serving interests of the few over the well-being of the many. They use the coercive power of government to secure advantages not enjoyed by others: regulations that favor them but hinder competitors, laws that prevent market entry, and government-sanctioned cartels.
- The dominant narrative about business is that it is greedy, exploitative, manipulative and corrupt. The majority of human beings on the planet thus experience themselves as furthering and supporting greed, exploitation, manipulation and corruption. When people experience themselves that way, they actually begin to become that way.
The biggest sin of capitalism as practiced today however is that it doesn’t work even on its own terms. It is making less and less money.
Conscious capitalism makes more money
Enter the new management paradigm. In addition to creating social, cultural, intellectual, physical, ecological, emotional, and spiritual value for all stakeholders, conscious businesses excel at delivering exceptional financial performance over the long term. For example, a representative sample of conscious firms outperformed the overall stock market by a ratio of 10.5: 1 over a fifteen-year period, delivering more than 1,600 percent total returns when the market was up just over 150 percent for the same period.
- Conscious businesses win, but they do so in a way that is far richer and more multifaceted than the traditional definition of winning, in which others must lose for someone to win.
- Conscious businesses believe that right actions undertaken for the right reasons generally lead to good outcomes over time.
- Traditional businesses give their managers hard targets for metrics like market share, profit margins, and earnings per share. Such metrics confuse cause and effect. To achieve those numbers— which are just abstractions— managers often knowingly undertake actions that are harmful to stakeholders, including, ultimately, shareholders. For example, managers might squeeze their team members or their suppliers. These actions may deliver the desired numbers in the next quarter, but they also plant the seeds for much bigger problems in the future.
The myth of profit maximization
The book argues that for capitalism to succeed, it has to shed the foundational belief that profit maximization is the sole purpose of business. This myth has done enormous damage to the reputation of capitalism and the legitimacy of business in society. Conscious capitalism aims to recapture the narrative and restore its true essence: the purpose of business is to improve our lives and to create value for stakeholders.
The authors envisage a heroic story of free-enterprise capitalism in which entrepreneurs use their dreams and passion as fuel to create extraordinary value for customers, team members, suppliers, society, and investors.
The thesis of conscious capitalism is that business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence, and it is heroic because it lifts people out of poverty and creates prosperity. It is grounded in an ethical system based on value creation for all stakeholders. Money is one measure of value, but it is not the only measure.
A new management paradigm for a new chapter in human history
Mackey and Sisodia argue that the new management paradigm is necessary in part because the landscape for business has been transformed. People today care about different things and are better informed, better educated, and better connected than in the past; their expectations from businesses in their roles as customers, team members, suppliers, investors, and community members are rapidly changing. Unfortunately, most companies have not evolved to keep pace with all these changes and are still doing business using mind-sets and practices that were appropriate for a very different world. It is now time to change that.
These changes are challenging. They also offer great business opportunities which however cannot be effectively addressed if we use the same mental models we have operated with in the past. “Business as usual” will not work anymore. We need a new philosophy to lead and work by.
Conscious capitalism is not about being virtuous or doing well by doing good. It is a way of thinking about business that is more conscious of its higher purpose, its impacts on the world, and the relationships it has with its various constituencies and stakeholders. It reflects a deeper consciousness about why businesses exist and how they can create more value.
As the figure shows, higher purpose and core values are central to a conscious business; all the other tenets connect back to these foundational ideas.
Stakeholder Integration
Stakeholders are all the entities that impact or are impacted by a business. Conscious businesses recognize that each of their stakeholders is important and all are connected and interdependent, and that the business must seek to optimize value creation for all of them. All the stakeholders of a conscious business are motivated by a shared sense of purpose and core values. When conflicts and potential trade-offs arise between major stakeholders, conscious businesses engage the limitless power of human creativity to create win-win-win-win-win-win solutions that transcend those conflicts and create a harmony of interests among the interdependent stakeholders.
Conscious Leadership
Conscious business requires conscious leadership. Conscious leaders are motivated primarily by service to the firm’s higher purpose and creating value for all stakeholders. They reject a zero-sum, trade-off-oriented view of business and look for creative, synergistic win-win-win approaches that deliver multiple kinds of value simultaneously.
Conscious culture and management
Conscious cultures naturally evolve from the enterprise’s commitments to higher purpose, stakeholder interdependence, and conscious leadership. They usually share many traits, such as trust, accountability, transparency, integrity, loyalty, egalitarianism, fairness, personal growth, and love and care.
Conscious businesses use an approach to management that is consistent with their culture and is based on decentralization, empowerment, and collaboration. This amplifies the organization’s ability to innovate continually and create multiple kinds of value for all stakeholders.
Conscious Capitalism provides an ethical foundation that is essential but has been largely lacking in business. The larger the company, the greater its footprint and therefore its responsibility to the world.
Conscious capitalism is not corporate and social responsibility
A good business doesn’t need to do anything special to be socially responsible. When it creates value for its major stakeholders, it is acting in a socially responsible way. The whole idea of corporate social responsibility (CSR) is based on the fallacy that the underlying structure of business is either tainted or at best ethically neutral.
Conscious capitalism is not shared value
Bill George’s foreword misleadingly suggests that conscious capitalism “dovetails perfectly” with the shared value idea of Harvard Business School guru, Michael Porter. Mackey and Sisodia take a different tack. Conscious capitalism focuses on shared human values, not just shared economic value. Shared value lacks the intangible but critical emotional and spiritual motivators that give conscious capitalism its extraordinary power. They say that shared value “feels more like a tactical readjustment rather than the kind of fundamental rethinking that is required today.”
Profits are best pursued indirectly
The book argues that profits are like happiness. The more directly you pursue happiness, the less likely you are to achieve it. While profits are an essential and desirable outcome for business. profits are best achieved by not making them the primary goal of the business. They are the outcome when companies do business with a sense of higher purpose.
The fact that many businesses make money by aiming to make money doesn’t disprove the book’s thesis: these businesses are currently simply competing against other similar businesses that are organized and managed with the same overall values and goals— maximizing profits. The real question is, how does a traditional profit-centered business fare when it competes against a stakeholder-centered business? Based on the data presented in Appendix A of the book, these firms won’t survive when competing with firms pursuing conscious capitalism: conscious businesses significantly outperform traditional businesses over the long run.
Thus business leaders need to become more aware that their business is not a machine but part of a complex, interdependent, and evolving system with multiple constituencies. From this perspective, they will see that profit is one of the important purposes of the business, but not the sole purpose. They will also see that the best way to maximize long-term profits is to create value for the entire interdependent business system. Once enough business leaders come to understand and accept this new business paradigm, conscious capitalism will reach a take-off point and the hostility toward business will start to dissipate.
Wide-ranging insights
The book has profound insights on a wide range of subjects, including:
Educating customers: At times, the book has two quite different personas: one is John Mackey, the uncompromisingly moralistic preacher of healthier living and the other is John Mackey, the practical businessman. The two personas come together when the book discusses why Whole Foods still carries a certain amount of junk food in addition to its predominantly healthy food: “The answer is that our company is in a never-ending dialogue internally and with our customers, trying to strike the right balance between being so restrictive that we no longer have a viable business and so permissive that we are no longer true to our core value concerning healthy eating. We have not found the right answer, once and for all. Ultimately, our customers ‘vote with their money’ every time they shop. Just as, over time, they have voted for more and more organic foods, we hope they will gradually vote the unhealthiest foods out of our stores by choosing not to buy them.”
Continuous innovation: Competition forces organizations to continuously improve, innovate, and to be more creative— or be left behind. To thrive, they have to offer customers new products, services, and value that their competitors don’t. What makes it even more challenging is that customer expectations about quality and value rise continuously.
Competition: If Whole Foods Market, for example, had to compete with Walmart strictly on the basis of supply chain efficiency or distribution economies of scale, it would be impossible for it to win. But what Whole Foods can do is be more nimble, more creative, and more innovative and provide higher-quality service while creating a better store environment. By the time Walmart figures out what Whole Foods is doing, Whole Foods will have moved on to newer and better innovations that create new value for its ever-evolving customers.
Marketing: Whole Foods thinks of marketing as enhancing the quality of its relationship with its customers. Everything that develops and deepens the relationship and builds trust is good marketing. Anything that detracts from that is bad marketing. As Trader Joe’s former president, Doug Rauch, puts it: “Since conscious businesses are purpose-driven organizations that are aligned with their stakeholders, they do not need to use marketing as a way to stimulate or create interest that otherwise wouldn’t be there. They can honestly share what’s true about their product or service. They don’t try to create demand artificially and temporarily; they just authentically communicate and connect with people around their common values.”
Genuine teams: Teams make their own decisions regarding hiring, the selection of many products, merchandising, and even compensation. Teams have profit responsibilities as well. Most of our incentive programs are team-based, not individual. For example, gain-sharing bonuses are awarded according to team performance. There is total transparency in the firm on compensation.
The firm is more than the sum of its parts: Analytical thinking can be a form of reductionism— it ignores the relationships stakeholders have with the business and with each other. No complex, evolving, and self-adapting organization can be adequately understood merely through analyzing its parts and ignoring the full system. A business is more than just the sum of the individual stakeholders.
Three types of corporate cancer: (a) The most common type of corporate cancer in business results from a focus on maximizing shareholder value and profits. When the investor is seen as the only stakeholder that matters, and the interdependency and the intrinsic value of the other stakeholders are denied, the business is at high risk of creating and growing a cancer that may one day destroy it. (b) The second stakeholder cancer threat comes from senior management teams that seek to maximize their own compensation without creating commensurate value. In many cases, executives simply pay themselves too much, with little concern for internal equity or connection with overall performance. In some companies, executive compensation is so high that it has a major impact on profits. (c) The third common cause of stakeholder cancer is team members who become selfish, damaging the whole business system of which they are part. Some organizations that are not strongly subject to market discipline develop a culture of entitlement.
Conscious Management is an organic whole: The four tenets of Conscious Capitalism comprise an organic whole; they are interconnected and interdependent. All the elements need to be in harmony and support each other. It is important, then, that the approach to management in a conscious business be consistent with the other tenets of Conscious Capitalism. In particular, the emotional and spiritual elements that define a conscious culture call for a particular kind of management approach so they can be fully expressed and reinforced.
Conscious management is a virtuous circle: it seeks to focus these creative energies in the most effective way possible by creating a virtuous cycle of reinforcing organizational practices. Decentralization, combined with empowerment, fosters innovation. Through collaboration, these innovations are shared, improved upon, and diffused throughout the organization, multiplying their effect and helping the company grow, evolve, and prosper. As discussed earlier, conscious businesses are largely self-organizing, self-motivating, and self-healing organizations. The most evolved ones are largely self-managing as well. Of course, this does not happen automatically; it requires a kind of “intelligent design” to create an operating system that is in harmony with the culture of a conscious organization and the fundamentals of human nature.
Quibbles
Conscious Capitalism is thus a major contribution to the literature of the new management paradigm. With a book that has so many virtues, it may seem churlish to criticize. But areas where the book is less strong include:
- Who is the most important stakeholder? The book rightly values all stakeholders and argues that if the firm does the right thing by all stakeholders, the customer will like it. In recent years, this assumption has worked out for Whole Foods, since Mackey’s passion for better food happens to coincide with a growing interest in the marketplace in the US for better food. But it’s a matter of fact in each case. In many other fields, customers are not so enlightened. In the end, the customer is the primary stakeholder. As Peter Drucker enunciated back in 1973, the only valid purpose of a firm is to create a customer.
- How do you measure progress in a firm practicing conscious capitalism on a daily basis? The idea that if the firm has the right values, everything will work out for the best is a view born more of hope than experience. The insights of Fred Reichheld on the net promoter system could have helped here.
- Agile and Scrum: How do you focus the work of teams on adding value rather than making money? Giving them P&L responsibilities runs significant risks. The discoveries of Agile and Scrum would help here.
- A tendency to over-statement. Not all the firms cited as practitioners of conscious capitalism actually implement the principles of conscious capitalism all the time. For instance, is Disney’s current purpose: “To use our imaginations to bring happiness to millions”? That might once have been a goal of Walt Disney the individual, but it hardly reflects the goal or practices of the global conglomerate that is Disney today.
- The history of shareholder value: The book tends to overlook the fact that the current single-minded obsession with shareholder value is largely a phenomenon of the last four decades, not something that has characterized business for centuries. In the overall scheme of things, the total focus on money and short-term profits is quite recent. To some extent, we don’t need to reinvent the future. We can recover from a relatively brief period of collective dementia by rediscovering values that we always had, but somehow forgot.
Making the paradigm shift happen
We are thus in the midst of a historic transition where it is becoming clear that the old paradigm no longer works and people’s minds are open to new possibilities. The great challenges and exciting opportunities of our era demand visionary thought and bold action.
Resistance to change may be lower, but it still exists. Experience shows that dominant paradigms die hard. When a new paradigm, even a clearly compelling one, is put forward, it encounters resistance from those with entrenched worldviews and much invested in the status quo. As the logical and empirical support for the new paradigm mounts, its opponents begin to attack it, often viciously. The next phase is usually an uneasy coexistence between the two paradigms. Eventually, the weight of accumulated evidence creates a tipping point in favor of the new paradigm.
Some leaders and established companies are responding to the philosophy of Conscious Capitalism and are taking tentative steps in this direction. The book sees the millennial generation (those born between approximately 1980 and 2000) that is coming of age right now as a key force for change.
The authors might also look to another potential driver of change: collaboration with other change movements. Thus while the book is right to differentiate conscious capitalism from mere management facelifts like shared value, it overlooks the commonalities that it shares with other movements genuinely dedicated to achieving a paradigm shift in management, such as the Management Innovation Exchange, the Stoos Network, the Drucker Society Global Network, the Beyond Budgeting Roundtable, the Scrum Alliance, the Agile Alliance, the Society for Organisational Learning and the Daedalus Trust. Recognizing and working together with these movements will lead to faster progress towards transformation than going it alone.
No one can doubt the authors’ passion for change. They find critically reassessing all of our mental models, assumptions, and theories for their continued accuracy and relevance to be scary but also exhilarating. There are so many new possibilities. For them, this is the best possible time to be alive, when almost everything you thought you knew is wrong.
Conscious Capitalism is a wonderful book, full of fiery passion and incisive insights. So buy it. Read it. Implement it. It’s a true guide to future.
And read also:
Whole Foods & the triumph of customer capitalism
Why we don’t yet see a Whole Foods economy
The dumbest idea in the world: maximizing shareholder value
Don’t diss the paradigm shift: it’s happening
Why the paradigm shift in management is so difficult
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Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010).
Follow Steve Denning on Twitter @stevedenning
