Advertiser Disclosure
X

Advertiser Disclosure: The credit card offers that appear on this site are from credit card companies from which MoneyCrashers.com may receive compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others.

By

Dig Deeper

23,535FansLike
18,233FollowersFollow
36,877FollowersFollow

Become a Money Crasher!
Join our community.

What Is Conscious Capitalism – Definition, Social Responsibility in Business

The idea that a growing economy benefits all classes has a long history of acceptance. It has been embedded in political rhetoric for the past half-century, regardless of party – in fact, John F. Kennedy is credited with the saying, “A rising tide lifts all boats.”

The theory – popularized as “trickle-down economics” – presumes that economic policies that help the wealthy eventually benefit everyone. It’s led to federal legislation reducing taxes on the wealthy and easing corporate regulation, as well as Supreme Court decisions increasing the legal rights of corporations, bringing them in near-parity with natural beings.

Despite expectations that the country as a whole would benefit from these measures, the results have been disappointing. Consequences have included a growing income disparity between the wealthiest members and the rest of society. It’s also led to an increase in national debt and significant corporate abuses of public trust, such as the manipulation of energy and securities markets. As a result, citizens and corporate leaders are rejecting the old paradigm and exploring a new model for capitalism.

Failures of Traditional Capitalism

The 1990s savings and loan failures, Enron’s manipulation of electricity prices in 2001, and the mortgage securities crisis in 2008 are major examples of the negative consequences of capitalism. In the view of many business and citizen leaders, corporate greed and uncontrolled capitalism have also had the following general negative effects.

1. Lack of Equality and Opportunity

The most public critic of the current capitalist system has been Pope Francis. In an apostolic exhortation issued November 26, 2013, he asserted that “today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.” The Pope goes on to say that the minority who do benefit “reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.”

Businesses overtly resist the efforts made by governments – which have the responsibility of protecting the rights and interests of their citizens – to pass laws or regulate corporate activities. All this, even as the wealthy benefit the most from publicly owned assets and exorbitant government contracts.

2. Worker Exploitation

According to a 2013 survey by the Public Religion Research Institution in partnership with the Brookings Institution, 54% of Americans think capitalism is working well. However, almost as many (45%) believe that not only is it failing, but that hard work and determination are no longer guarantees of success for the majority of people. The same survey indicated that 53% of Americans believe “one of the big problems in this country is that we don’t give everyone an equal chance in life.”

Surprisingly, 39% of those polled felt differently: “It is not really that big a problem if some people have more of a chance in life than others.” This conflict is most apparent when looking at such issues as the minimum wage. Americans are almost equally split as to whether it should be increased from $7.75 per hour, even though there is widespread agreement that it does not provide enough money to meet the basic needs for a great many American families.

3. Growing Disparity of Wealth and Income

Since the mid-1970s, the nation’s wealth and income have gone increasingly to the top 10% of citizens – dramatically so to the top one-hundredth of 1%. In 2012, the top 10% of families owned 74.4% of America’s wealth while the top 0.01% had an astounding 11.1%. The bottom 90% owned a meager 25.6% of the pie.

There are approximately 78.8 million families in the U.S and they have a combined net worth of $80.7 trillion. To put these percentages in perspective, on average, the total net worth of the less than 8,000 families in the top 0.01% is almost $9 trillion, while the combined net worth of the almost 71 million remaining families is $21 trillion.

These gaps between wealthy and average Americans have concerned economists and politicians on both sides of the aisle, including the following:

  • In his book “The Price of Inequality: How Today’s Divided Society Endangers Our Future,” Nobel laureate economist Joseph E. Stiglitz writes that “we are paying a high price for the inequality that is increasingly scarring our economy. Since those on the low end of income spend a greater proportion of their income than higher earners, the concentration of wealth reduces total expenditures, putting a brake on growth and promoting instability.”
  • According to Jared Bernstein, senior fellow at the Center on Budget and Policy Procedures, high levels of income disparity encourage and preserve opportunity barriers, holding the majority back. Bernstein says that the effects are evident in the gap between parents’ investment in their children for tutoring, art, sports, and books – the gap in academic achievement standardized tests has increased 40% in the last 30 years, and college attainment and admission into an applicant’s university of choice is more likely for kids from wealthy families.
  • A recent Standard & Poor’s report links the income disparity with a slowdown in state tax revenue, since the wealthy manage to shield much of their income from taxes and spend a lower percentage of it. According to Gabriel Petek, S&P credit analyst, “Rising income is not just a social issue. It presents a very significant set of challenges for the policymakers.”

French economist Thomas Piketty, who some have called “the most important thinker of his time” according to The Guardian, wrote the best-selling book “Capital in the Twenty-First Century” about the dynamics of capitalism and the increasing concentration of wealth in the hands of the very few. In simple terms, Piketty projects that the income disparity will continue to widen due to the growing share of national income going to the owners of capital – inherited wealth – and top executives of corporations who are beyond the control of shareholders. He also concludes any significant change in direction is unlikely since the holders of wealth, energized by Supreme Court decisions, will aggressively defend their positions.

4. Corporate Moral and Ethical Irresponsibility

The combination of deregulated markets, management insulation from shareholder control, and the emergence of “too big to fail” institutions have led to unbridled greed and excessive risk-taking. Huge, multinational corporations have severed allegiances or obligation to any country or citizens, being solely dedicated to maximizing profits for their shareholders.

As a consequence, they engage in the following activities:

  • Wholesale Export of Critical Manufacturing Jobs. These jobs are most often transferred to countries with minimal ecological, labor, or human rights laws.
  • Complicated Corporate Maneuvers to Avoid Taxes. The unethical, possibly illegal combination of corporate changes in domicile, complex tax accounting, and active support of the world’s tax havens is practically universal by large multinationals.
  • Excessive Participation in the Political Process. Political action committees (PACs) can raise and spend unlimited sums of money to advocate for or against political candidates. As of October 14, 2014, 1,209 super-PACs had raised almost $370 million and spent $205 million. Corporations and their executive officers contribute millions of dollars through PACs to support candidates who promise to deliver laws and regulations favorable to their supporters.

Evidence of widespread corruption and self-serving tax evasion is worldwide, leading Pope Francis in his 2013 apostolic exhortation to condemn “the thirst for power and possession [that] knows no limits.”

5. Ecological Disasters

Multinational corporations have treated the environment as a free resource – arable land, water, minerals, forests, fish, and so forth – without regard for long-term consequences. Many observers claim that global corporations have ravished the world, leaving residents of every nation to live with the consequences: dirty air, foul water, and pollution of every sort.

Multinational Corporation Disasters

A New Vision of Capitalism

In response to failures such as these, John Mackey, co-founder and co-CEO of Whole Foods Market, and Raj Sisodia, a professor of marketing at Bentley University, Waltham, Massachusetts, collaborated in 2013 to propose a new, enlightened form of capitalism. Their book, “Conscious Capitalism,” suggests that business and capitalism can and should work together for the benefit of all stakeholders –  customers, vendors, creditors, the public, or any other group that can affect or be affected by the actions of a business – and not exclusively for the benefit of shareholders or solely because doing good may be profitable.

The authors claim that the exclusive focus on short-term profits led to the financial meltdown and global recession in 2008, as well as unethical behavior, wanton pollution of the planet, demands for a 24/7 work ethic (despite cutbacks in support), and a general distrust of business. They argue that corporations should exist for a greater purpose than simply making money for their shareholders. The authors argue that true leadership requires a vision beyond financial goals, courage in spite of apathy and opposition, and determination to make America and the world a better place for all of its inhabitants.

Examples of Conscious Capitalism

Examples of conscious capitalism abound in the actions and philosophies of companies such as Whole Foods Market, Southwest Airlines, Costco, Google, and The Container Store. Walmart, the world’s largest corporation, announced plans to purchase an additional $250 billion worth of products made in the U.S. during the next decade, hopefully helping to reinvigorate the American manufacturing base. Walgreens pioneered a company-wide effort to prove that people with disabilities can be exceptional employees, capable of the same production and entitled to the same compensation as able-bodied workers.

In the case of Walgreens, there is factual evidence that doing good is not anti-capitalistic, but can, in fact, enhance profitability. These programs – and others like them in large and small corporations across the country – are evidence that American executives are considering a new paradigm of corporate responsibility.

The Performance Premium of a Conscious Capitalism Philosophy

Dr. Sisodia and his colleagues at Babson College have studied the performance of 28 publicly traded U.S. firms they believe operate with the general philosophy of conscious capitalism. They have designated them “Firms of Endearment,” or FoEs, the title of Dr. Sisodia’s book detailing the study.

The financial performance of these 28 FoEs, which include Amazon, Disney, and T. Rowe Price, were compared to the following types of companies:

  • International FoEs. This list identifies and summarizes the results of 15 non-U.S. companies domiciled around the world that also operate in a mode of conscious capitalism.
  • “Good to Great” Companies. The 11 firms of this group were initially identified in author Jim Collins’s bestselling book “Good to Great,” and described as having delivered superior returns to investors over an extended period of time.
  • S&P 500. This group consists of the 500 publicly traded companies making up the Standard & Poor’s 500 Index. Each company is selected by committee and deemed representative of the industries in the U.S. economy.

Their findings prove that the payoff for doing the right thing is not insignificant. The FoEs outperformed the S&P 500 firms by 14 times and the Good to Great firms by six times during a 15-year period.

Key Tenets of Conscious Capitalism

Mackey and Sisodia believe there are four key tenets of conscious capitalism that must be in place if businesses are going to reap the benefits of a new corporate culture.

1. A Higher Purpose

Sustainable businesses that create shared value among the stakeholders are driven by purpose. Financial returns are the result of improving people’s lives.

2. Stakeholder Integration

The needs of all stakeholders (all those who can affect or be affected by the actions of a business) are considered to develop win-win outcomes instead of trade-offs. Enlightened corporate leadership creates loyal customers, inspires employees, trusts and is trusted by suppliers, and generates profits, all while being part of the communities in which it resides.

3. Conscious Leadership

Businesses need ethical, self-aware leaders who are motivated primarily by service and purpose, rather than the highest paycheck. They need to “walk the walk” as well as “talk the talk.”

4. Sustaining Culture

A company’s culture reinforces its own purpose, ethics, and activities. A conscious culture, according to the authors, has seven characteristics:

  1. Trust. Having faith that other members of the business can be relied upon, that interests and values are shared, and that truth is nonnegotiable.
  2. Accountability. Members of the community are willing to accept responsibility for their actions and omissions in order to continuously learn and improve. Being “real” in relationships means being able to give, take, and evaluate meaningful criticisms and suggestions.
  3. Caring. Management and business are not about manipulation or power, but rather genuine regard for the interests of others. Products perform as expected, customer service is about solving problems, and benefits are not exclusive to any favored group of employees or customers.
  4. Transparency. Decisions are made in the open where rationale can be examined and questioned in an environment of continual progress and learning, not fault-finding.
  5. Integrity. Businesses and individuals with integrity recognize that morals should and must be applied to all business decisions. It is the courage to always try and do the “right” thing, rather than the easiest, most profitable, or least risky.
  6. Learning. Situations and people continually change, so the right decision in one situation may not be appropriate in another. Progress is an uneven, upward path of trial and error, constant adjustment, and modification. A culture becomes vibrant if it “learns,” understanding changing relationships and conditions in the context of a moral absolute.
  7. Egalitarianism. What some call “empowerment,” responsibility is shared throughout organizations, recognizing that everyone has a stake and a role to play in its ultimate success.

Sustaining Company Culture

Final Word

The future of American capitalism is uncertain. If the current trends continue unabated, social unrest and heightened political conflict are inevitable. On the one hand, many business leaders continue to espouse that, while corporate social responsibility does not exist, the profit opportunities in big social problems will attract the engagement of major corporations to find workable solutions. As Scott Cook, founder of Intuit, is quick to acknowledge in The New York Times, “We look for places we can use our strengths as a company to help solve big problems.”

On the other hand, business leaders and the organizations they direct are just beginning to challenge the old way of doing business and the idea that profits should be the only, or even the primary, purpose of a company. By treating people with trust and care, respecting and restoring the ecosystems around us, and recognizing that all aspects of our lives and the world are interconnected, business leaders like Mackey, Sisodia, and Jeff Klein, author of “Working for Good: Making a Difference While Making a Living,” may be able to ignite a movement to transform and save capitalism from itself. At the same time, as enlightened consumers become more sensitive to issues of social responsibility, businesses should have difficulty operating under the old philosophies and will find themselves having to change to keep their customers.

Do you think corporations have any social responsibility?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

Next Up on
Money Crashers

job search newspaper

Top 16 Jobs That Require Little or No Experience

Are you fresh out of school, looking for a job, but lacking in experience? You might think this will stop you from landing a...
Cheap Luxuries Avoid Frugal Fatigue

How to Avoid Frugal Fatigue by Splurging on These 12 Cheap Luxuries

When you're trying to save money, it's easy to make the mistake of being too strict with yourself. Like a person starting out on...

Latest on
Money Crashers

Sign Up For Our Newsletter

See why 218,388 people subscribe to our newsletter.

What Do You Want To Do
With Your Money?

Make
Money

Explore

Manage
Money

Explore

Save
Money

Explore

Borrow
Money

Explore

Protect
Money

Explore

Invest
Money

Explore