Chapter 1
Why Conscious Capitalism?
Before starting the field guide proper, we begin in this chapter with a brief review of the history of Conscious Capitalism for those who are new to the ideas or who would like a refresher. Here, you’ll find the background historical and contemporary contexts that gave birth to the idea of Conscious Capitalism; the four tenets that comprise both the intellectual foundation and the blueprint for practicing Conscious Capitalism; and the business case for Conscious Capitalism. The chapter ends with some things to keep in mind as you start—or continue—your journey to Conscious Capitalism.
The Context
Free-Market Capitalism
So-called modern free-market capitalism or industrial capitalism was born from three seminal events that occurred within a quarter century of each other. The first, the beginning of the Industrial Revolution around 1750, was perhaps the greatest single advance in the history of human civilization, elevating our productive capacity and thus material living standards dramatically. The second event, the 1776 publication of An Inquiry into the Nature and Causes of the Wealth of Nations, explained the power of free markets. And the US Declaration of Independence, also in 1776, was the first time a country came into existence purely because of a set of ideas, all of which revolved around personal freedom: religious, political, and economic.
This potent combination of events proved to be transformative for humankind: the technological revolution of the Industrial Revolution; the intellectual breakthrough of The Wealth of Nations; and the oxygen of freedom that existed first in the United States (though it was restricted to white males). Life for ordinary human beings improved on an almost vertical trajectory. After millennia in which average people saw very little improvement in the duration and quality of their existence, the last two centuries have seen extraordinary gains. Capitalism has lifted far more people out of poverty than has any other idea or institution in history—by orders of magnitude. Since 1800, per-capita incomes worldwide have risen fifteenfold in real terms (adjusted for inflation); the percentage of people living in extreme poverty has dropped from 90 percent to around 9 percent. Life expectancy has more than doubled, our population has risen sevenfold, and literacy has gone from 12 percent to 86 percent worldwide.1
At a Crossroads
Despite all that extraordinary progress, we stand today at a perilous crossroads. The institution of capitalism is being threatened by its own excesses and myopic interpretation. Many people today are cynical, discouraged, and divided. Facing a crisis of confidence, business is no longer seen by many as a force for good in society but rather is seen as a core part of the problem. The rising skepticism about business leads to a questioning of the legitimacy of businesses to operate in society when the wealth and other benefits created by businesses seem so strikingly unevenly distributed. This disconnect raises serious questions about the business models that exist today.
To understand this disconnect, we need to go back to capitalism’s birth. In The Wealth of Nations, Scottish moral philosopher Adam Smith established that individuals’ pursuit of self-interest was the foundation for how societies rooted in personal freedom can harness the self-organizing power of markets to elevate living standards. Seventeen years earlier, Smith also wrote The Theory of Moral Sentiments, a book about the human disposition to care about others, without regard to self-interest. Most people have ignored or forgotten this earlier book. If we had integrated those two dimensions—the human need to care and the drive for self-interest—into the practice of business, we would have created a much richer humanistic and intellectual foundation for capitalism than what we ended up with. Resting on the single pillar of self-interest alone, capitalism evolved into a powerful and dynamic system that, unfortunately, hurt the well-being of many workers and the environment, even as it generated great material prosperity.
The pursuit of self-interest and the need to care—these two qualities should have been the two engines of capitalism. But for too long, the plane of capitalism has been flying with just one engine.
The fundamentals of capitalism—the rule of law, private property rights, and the voluntary exchange of goods, services, and ideas—remain as important as ever. But we need to bring in what has been missing: the human dimension.
Searching for a Better Way
To a large extent, businesses are still operating under the ideals of the Industrial Revolution and are using an operating system that was developed in the industrial age, using the military as the organizing metaphor. Little has changed in this way of thinking. The idea that the sole purpose of business is to make profits for shareholders and that everything else is a means to that end remains the dominant mental model for business. We still teach this in business schools.
But the traditional narrative of business and capitalism—that it is exclusively about maximizing profits—is increasingly being recognized as inadequate, uninspiring, and often toxic. Particularly in the West, there is a broad reform movement around capitalism, with terms like creative capitalism, inclusive capitalism, breakthrough capitalism, sustainable capitalism, capitalism 2.0 and 3.0, to mention a few. Conscious Capitalism, part of a growing movement that recognizes the tremendous value and potential of capitalism, is seeking to elevate this powerful force for potential good to a new level. We, and you in reading this book, are a part of an effort to reframe the dialogue around business and capitalism as a force for good in the world.
Today we are at a tipping point, where the old model is rapidly collapsing. As exemplified by companies like Southwest Airlines, Patagonia, Google, Unilever, Danone, and Zappos, business is becoming more conscious about the many impacts that commerce has on people’s lives and on the planet. These and other companies are recognizing that the decisions they make affect more than the bottom line.
Conscious Capitalism is a response to these concerns, suggesting that there is a better way for businesses to operate—a way for organizations to be as human as the people who work in them. It offers a new model that can help society move forward in a harmonious and productive way to bring about broad-based flourishing for all.
The Concept
To many, the terms conscious and capitalism are unlikely bedfellows.
Thinking in terms of psychologist Abraham Maslow’s classic hierarchy-of-needs framework, business and capitalism have mostly operated at the lower levels, which have to do with survival, safety and security, and self-esteem. But we humans are capable of and care about so much more than that. Many more of us are now driven by higher-level needs such as building community, finding meaning and purpose, and serving humanity.
In choosing the phrase Conscious Capitalism, we are very deliberately leaning in to a more basic form of entrepreneurial capitalism, where the entrepreneur acts to create value and address issues that people care about and that make a difference in the world. When we refer to Conscious Capitalism, we are looking at the heroic potential of business and entrepreneurs to do well and to do good in the world.
When conducted with higher consciousness, business is the ultimate win-win-win game in the world. Businesses’ potential to create value is extraordinary, and it does not come at the expense of our health or the health of our planet.
The conscious part of Conscious Capitalism refers to businesses’ and their leaders’ growing awareness of commerce’s potential to do far more than make money and of mindsets and business models they choose to operate with. Conscious Capitalism means being aware of your purpose as an organization, seeing the interconnectedness of all stakeholders, and striving to create workplaces infused with dignity, meaning, and joy.
Conscious Capitalism has four key pillars or tenets: higher purpose beyond profit, creating value for all stakeholders and integrating their interests, conscious leadership, and conscious culture. These tenets work together and reinforce each other.
- Higher purpose: As suggested by Simon Sinek’s book title Start with Why, every business should have a higher purpose that transcends making money. A company’s higher purpose is the difference the firm is trying to make in the world. By focusing on its higher purpose, a business inspires, engages, and energizes its stakeholders. Profit is not the purpose, although it is one of the many important measures of a business’s functioning and is necessary to enable a business to achieve its purpose. The business does not exist merely to generate profits, but also aims to generate multiple kinds of value for all its stakeholders (profit is a specific value for one of its stakeholders, the shareholder).
- Stakeholder orientation: Recognizing the interdependent nature of life and the human foundations of business, a business needs to consciously create value with and for all its stakeholders (customers, employees, suppliers, investors, communities, the environment, etc.). We need to shed the trade-off mentality and look for synergies, for simultaneous wins for each stakeholder. Creating win-win-win relationships between stakeholders becomes the modus operandi of the business.
- Conscious leadership: Conscious leaders transcend narrow self-interest; they are primarily motivated by purpose and service to people rather than by power and personal enrichment. They mentor and motivate, develop and inspire people. A firm that uses financial incentives alone to attract and motivate leaders will get precisely what it pays for: leaders who are primarily motivated by money. Such leaders are far less capable of inspiring their employees to extraordinary levels of engagement, creativity, and performance.
- Conscious culture: Most businesses run on fear and unhealthy levels of stress. They pay little attention to their culture, allowing it to evolve on its own. Conscious organizations intentionally foster cultures with high levels of trust, authenticity, transparency, and genuine caring.
Conscious Capitalism represents a comprehensive rethinking of what business can and should be. The movement seeks to change the narrative of business in accordance with these principles.
The tenets of Conscious Capitalism reflect universal human values, transcending any differences in history, language, religion, and culture. At their core, these ideas are rooted in human dignity, freedom, and caring. They speak to the deep inner striving toward meaning and purpose that is a hallmark of the contemporary zeitgeist. The ideas reflect the hunger and determination of enlightened leaders to not be confined by the tired “dogmas of the quiet past” (in Abraham Lincoln’s elegant phrase), especially when it comes to how we should think about and practice business.
The Case
In the end, Conscious Capitalism is simply a better way to do business. This approach includes but is not limited to generating superior financial returns over the long run. A conscious business is still a business; it must have a good business model, sound competitive strategies, and the discipline to execute and run the business well. To these basic good business practices, Conscious Capitalism adds the four tenets described earlier. The combination of good business practices and the four pillars of consciousness elevates businesses to greater operational success and makes them agents of societal flourishing.
There is strong and growing evidence that conscious companies significantly outperform the market financially. For example, the first edition of Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (2007) reported that conscious companies outperformed the S&P 500 index by nearly nine to one over a ten-year period. In the second edition (2014), the ratio was fourteen to one over a fifteen-year period for an expanded set of companies. Table 1-1 shows updated financial performance numbers for those companies as of June 30, 2017.2
TABLE 1-1
The financial dimension of corporate performance depends on a company’s ability to increase its revenue and efficiency. Conscious businesses are superior on both these dimensions, because they are better aligned with the true needs of customers and are focused on investing money where it makes a difference (such as on rank-and-file employees and high-quality suppliers) and saving money in non-value-adding areas (such as excessive marketing costs and high employee turnover).
The consequences of being a truly conscious company are many. These include much greater employee engagement, passion, and commitment; delighted and loyal customers who are advocates of the company; and suppliers that are loyal and innovative. Conscious firms also enjoy a strong reputation that improves their ability to attract customers, employees, investors, and support from citizens. These firms have a positive impact on the environment and good relationships with the media, governments at all levels, and many advocacy groups. They also enjoy higher levels of innovation. These outcomes are all positive in themselves; even if they have a neutral or slightly negative impact on financial performance, the firms would still be justified in pursuing these results.
However, as the following studies indicate, each of these factors is also positively correlated with financial performance.3 When all the tenets are present in the same company, the collective and cumulative impact on financial performance can be dramatic.
- Environmental responsibility and performance: A study found that highly rated companies outperformed low-rated companies by 5.06 percent per year.4
- Customer satisfaction and stock returns: Researchers from the University of Michigan found that companies in the top 20 percent of the American Customer Satisfaction Index outperformed the Dow Jones Industrial Average by 90 percent, the S&P 500 by 201 percent, and the NASDAQ by 335 percent over a six-year period.5
- Social responsibility and the cost of equity capital: A study found that an increase of one standard deviation in a firm’s social responsibility was associated with a decline of ten basis points in a firm’s equity premium.6
- Employee satisfaction and stock returns: Alex Edmans of the London Business School and colleagues have found that the “Hundred Best Companies to Work For” in the United States outperformed all benchmarks by 2.3 to 3.8 percent per year between 1984 and 2011. He noted that there was a delay of up to four or five years for the market to reflect the impact of being an outstanding company to work for.7 Subsequent research showed that returns are similarly high in fourteen countries around the world; the US returns ranked tenth-highest in that group. The higher the labor-market flexibility, the higher the returns associated with being a great place to work.8
- Trust and growth: Higher levels of trust lead to rapid growth; a one-standard-deviation increase in trust was associated with an approximately 30 percent increase in firm size. Greater trust also results in greater decentralization.9
- Sustainability and organizational processes and performance: Between 1993 and 2009, high-sustainability firms outperformed low-sustainability ones by 4.8 percent per year. High-sustainability firms were also found to be more stakeholder oriented.10
- Corporate culture and performance: Firms that simply advertise values on their websites or in their annual reports but do not reflect these in practice exhibit no financial outperformance. Firms with higher levels of integrity have higher profitability. Such firms are also more attractive to job applicants. Private firms were found to have higher integrity levels in publicly traded firms.11
- Environmental, social, and governance scores and financial performance: One meta-analysis examined 2,200 unique academic studies since the 1970s and found that approximately 90 percent of the studies report a neutral or positive relationship between environmental, social, and governance criteria and financial performance. Of the more sophisticated studies, 62.6 percent found a positive relationship. Environmental and governance scores were more positively correlated with financial performance than were social scores.12
- Stakeholder orientation and innovation: Between 1976 and 2006, thirty-four US states enacted constituency statutes, which enable corporate directors to consider the interests of stakeholders other than shareholders in their decisions. One study found that the number of patents increased by approximately 6.5 percent within twelve to twenty-four months of the enactment of such statutes, rising to 8 percent after forty-eight months. The study also found that these innovations are more potentially groundbreaking than those seen in shareholder-centric firms.13
- Corporate social responsibility and market or systematic risk: Firms with more social responsibility have lower systematic risk. This benefit was attributed to higher customer loyalty.14
- Social capital and performance: During the 2008–2009 financial crisis, firms with higher social capital had stock returns 4 to 5 percent higher than did firms with low social capital.
Given this wealth of evidence, anyone would be hard-pressed to credibly argue that companies should ignore these social and human-based objectives and simply revert to the traditional profit-maximizing, shareholder-centric approach. Businesses won’t be able to afford not to practice Conscious Capitalism in the future. Why would you operate any other way? Conscious Capitalism is a far better way to do business, because it drives superior returns without imposing costs on humans or the planet. In fact, the conscious approach enables humans and the planet flourish while delivering superior financial results.
The Compass
The Journey Ahead
Leaders and entrepreneurs around the world are reimagining business as a vehicle for service, for the uplifting of humanity, rather than as a way to make as much money as possible. The profit-above-all mindset often results in cynically preying on people’s ignorance or vulnerabilities. Companies of any age and any size in any sector, public or private, can choose to embark on the journey toward Conscious Capitalism.
Because the tenets of Conscious Capitalism are easy to understand, their power and relevance are rarely questioned. But the question that we hear around the world once people are exposed to these ideas is “How?” Entrepreneurs and business leaders want to know how they can implement these ideas, how they can transform existing companies and build new ones so that the tenets of Conscious Capitalism become part of the DNA of their companies.
The book you now hold in your hands is our contribution to that end. We hope this field guide will help inspire you and other leaders and their teams by bringing the principles of Conscious Capitalism vividly to life in organizations. The book brings theory, insights, and cases to help entrepreneurs, CEOs, and other leaders at every level start practicing the principles of Conscious Capitalism. The book will help you devise and implement new business models that simultaneously create financial, social, and environmental well-being for all stakeholders. It will help people connect to their purpose and help you discover the unique purpose that your company can fulfill in the world.
Some Caveats
Leaders who seek to create conscious businesses only because such businesses might make more money will likely not succeed. An essential truth about life is that we must strive to do the right things for the right reasons. We can never really control the outcomes of our actions, but in business, we have created the illusion that we can. Most companies give managers hard targets for market share, profit, stock price, and so forth. To achieve those numbers—which are just abstractions—managers often make decisions that harm the interests of most stakeholders. By squeezing their employees or suppliers, the managers may deliver the desired numbers in the next quarter, but doing so plants the seeds for bigger problems in the long term. If we focus on the right actions as a person or as a company, positive outcomes will result over time.
Adopting a Conscious Capitalism approach cannot compensate for having a poor business model and an underdeveloped strategy. Business leaders and their organizations have to demonstrate that they have a strategy and an economic model that can survive and thrive in their chosen marketplace. We assume the basics of having found a market with a need, a viable value proposition, and efficient processes that can deliver in a self-sustaining and profitable manner. Conscious Capitalism then enables that company to succeed at a higher level and achieve lasting significance.
Bon Voyage
Human beings are not a resource; they are a source. A resource is like a lump of coal that burns to ashes, but a source is like the sun; it keeps on generating light, warmth, and energy. People can generate extraordinary amounts of creative energy, inspiration, love, and care. There is no more powerful source of creative energy in the world than an inspired and empowered human being. A conscious business energizes and empowers people and engages their best contributions in service of its noble higher purpose. By doing so, the business has a profoundly positive net impact on the world.
In 1925, President Calvin Coolidge famously said, “The chief business of the American people is business.” Too many people have taken this observation to suggest that American people are and should be concerned only about the profits generated by business. Herb Kelleher, the legendary leader who built Southwest Airlines into the most successful airline in the history of the world, did it using the dictum “The business of business is people: yesterday, today, and forever.” Of the three sectors of society (private enterprise, government, and civil society), business has the greatest role to play in bringing about a better future for all humanity and the planet as a whole. If we can indeed make business our chief business, but ensure that it is first, foremost, and forever about the well-being of people, we can bring about universal flourishing in the world.
Conscious Capitalism is not just about business reaching its potential. It is about how we will continue to thrive and bring the benefits of longevity, modernity, and our extraordinary human potential to the billions on this planet yet unborn or still struggling through life.
To paraphrase Lynne Twist, founder of the Pachamama Alliance, a nonprofit dedicated to empowering the indigenous people of the Amazon rain forest, those of us who are alive today have the opportunity to lead the most meaningful lives that human beings have ever led on this planet. Our challenges are tremendous, but so is our awareness of those challenges as well as our ability to tackle them. Business will have to lead the way, but they cannot do so if we continue to operate as we have in the past. Conscious businesses can release the extraordinary capacities that remain locked up in most human beings. By doing so, they unleash the most powerful form of renewable energy ever discovered on this planet: passionate, empowered, fully engaged, caring, and purposeful human beings.
You are now ready to begin the journey. The next chapter, your starting point, asks you to think about where your organization is now. How does your organization define success? Where does your organization want to go? To help you reflect on these questions, we include a candid, in-depth interview with the leader of one of the most conscious businesses on the planet—a century-old beer-brewing company in Costa Rica (yes, a company that makes and sells alcoholic beverages can be conscious!)—and the truly inspiring ways that leaders there evolved their thinking about their purpose and their role in bringing a better way of living to the world.