Raj Sisodia is a leading figure in the Conscious Capitalism movement – he is the FW Olin Distinguished Professor of Global Business and Whole Foods Market Research Scholar in Conscious Capitalism at Babson College in Wellesley, MA. He is also Co-Founder and Co-Chairman of Conscious Capitalism Inc.
Let’s begin by asking: what is a conscious business? And what is conscious capitalism?
Conscious Capitalism is not a business strategy or business model. It is a comprehensive philosophy of doing business.
Too many businesses generate financial wealth at the expense of social, cultural, environmental, intellectual, physical, and spiritual wellbeing. They are extracting value rather than creating value. Conscious Capitalism is about doing business with a spectrum of positive effects, not having one positive “main” effect and many negative “side” effects. Conscious businesses spend money where it makes a positive difference. They don’t waste money on unnecessary advertising, gimmicky promotions, and the revolving door of high employee and supplier turnover. They empower people and engage their best contribution in service of a higher sense of purpose. They make a net positive impact on the world.
Let’s define this more clearly.
The four tenets of Conscious Capitalism are interconnected and build on important academic work relating to purpose, stakeholder management, leadership, and culture:
Higher Purpose: Recognizing that every business should have a higher purpose that transcends making money. It is the difference the company is trying to make in the world. By focusing on its Higher Purpose, a business inspires, engages and energizes its stakeholders.
Stakeholder Orientation: Recognizing that the interdependent nature of life and the human foundations of business, a business needs to create value with and for its various stakeholders (customers, employees, vendors, investors, communities, etc.). Like the life forms in an ecosystem, healthy stakeholders lead to a healthy business system.
Conscious Leadership: Human social organizations are created and guided by leaders – people who see a path and inspire others to travel along the path. Conscious Leaders understand and embrace the Higher Purpose of business and focus on creating value for and harmonizing the interests of the business stakeholders. They recognize the integral role of culture and purposefully cultivate Conscious Culture.
Conscious Culture: This is the ethos – the values, principles, practices – underlying the social fabric of a business, which permeates the atmosphere of a business and connects the stakeholders to each other and to the purpose, people and processes that comprise the company.
How do you recognize a conscious culture?
A Conscious Culture is captured in the acronym TACTILE:
– Learning, and
The word “tactile” also suggests that the cultures of these companies are very tangible to their stakeholders as well as to outside observers; you can feel the difference when you walk into a conscious business versus one that is purely driven by a profit motive and run just for the benefit of shareholders.
These four elements of Conscious Capitalism are mutually reinforcing, and describe a comprehensive systems perspective on business that is far richer and more complex than traditional machine metaphors.
Of course, we don’t presume that the way we have defined Conscious Capitalism is the final word. What we have offered is a dynamic definition, one that will evolve as our consciousness grows.
How is a conscious business different from a traditional business?
Almost everything about a conscious business is different from traditional business.
A firm that uses financial incentives alone to attract and motivate a CEO will get precisely what it pays for: a CEO who is primarily motivated by money.
Such leaders are incapable of inspiring their employees to achieve extraordinary levels of engagement, creativity, and performance. The most effective leaders are those who transcend self-interest; they are primarily motivated by purpose and service to people.
We don’t believe that a firm that treats its employees unfairly can prosper in the long-term in the transparent and incredibly connected world we now inhabit.
Good employees have a choice, and over time will migrate to firms that offer them not only fairness, but more importantly the opportunity to find meaning and purpose in their work. Companies cannot offer attractive, innovative products if they do not have engaged employees and high quality suppliers.
This is an evolutionary process. Apple, E-Bay, Microsoft, Facebook, and H&M are all gradually moving towards a more conscious way of being, as are many other companies such as Wal-Mart, McDonald’s, General Electric, and Procter & Gamble.
What about outsourcing?
Many companies do outsource production to low-wage locations to lower costs, and many lay off employees to improve their financial performance. Our experience with conscious businesses is very different. Customers are increasingly aware that there are good ways and bad ways to lower costs. Conscious businesses lower their costs and offer attractive prices to customers by eliminating wasteful spending, not by squeezing their employees or suppliers.
There is nothing inherently bad about outsourcing. If it is done in a conscious manner, outsourcing creates opportunities in less-developed parts of the world and helps to lift people out of poverty. However, if it is done purely to reduce costs without regard to its human consequences, it is no doubt harmful.
When sales decline, conscious businesses do not automatically revert to layoffs in order to lower costs. In the recent economic downturn in the U.S., conscious businesses such as The Container Store and REI made it through by operating with a sense of shared sacrifice. Despite steep declines in sales, they chose to protect the jobs and pay of their most vulnerable employees: those who work part-time (referred to by The Container Store as “primetime” employees). Salaried employees took across the board pay cuts to get through the downturn. Such companies have emerged from the recession with stronger cultures and a deeper sense of shared purpose than they had before.
And what about financial performance?
Our research has found that conscious companies significantly outperform the market financially; in the first edition of my book Firms of Endearment: How World Class Companies Profit from Passion and Purpose (2007), we found a nearly 9-to-1 ratio of outperformance over a ten-year period. In the second edition (2014), the ratio was 14-to-1 over a 15 year period.
The financial dimension of corporate performance depends on a company’s ability to grow its revenue and improve its efficiency. Conscious businesses are superior on both of 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 levels of employee turnover).
Currently, much of the growth of conscious businesses comes at the expense of their less-conscious competitors. If their competitors also become conscious businesses, such companies can still find healthy ways to grow by creating additional value through meeting the higher-level needs of their customers.
And, as competition among conscious businesses increases, it creates further impetus for innovation that benefits the companies and all of their stakeholders.
We have been working to understand how conscious businesses are able to operate with superior financial results while creating many forms of wealth and wellbeing for all of their stakeholders, including society. It boils down to something quite simple: these companies knowingly operate with lower gross margins than they could achieve, but are still able to achieve higher net margins than their traditional competitors.
Most companies try to maximize their gross margin by looking for the cheapest suppliers they can find, and then using whatever bargaining power they have to squeeze them as much as they can to get ever-lower prices. As a result, they end up with low-quality suppliers who struggle to stay profitable, and who can ill afford to invest in new technologies or anything else that will improve their quality or make their products more innovative.
Most companies also try hard to keep their payrolls down, minimizing what they pay to their rank-and-file employees, and are stingy with critical benefits such as health insurance. They try to use part-time employees as much as possible, keeping them under the threshold where they would qualify for any kind of benefits. They provide minimal training to their employees, and accept high employee turnover as inevitable.
Conscious businesses are very selective about their suppliers, looking for innovative, quality-focused companies that also operate in a conscious manner. They enter into mutually beneficial long-term partnerships with them. Suppliers are well paid, and in turn pay their own suppliers and employees well. Conscious businesses also pay their rank-and-file employees very well, significantly above the industry norm, and are generous with benefits. Since their direct costs are higher, the gross margin of a conscious business is typically lower than average.
Conscious businesses typically have to spend very little on marketing. This is because they have legions of satisfied and delighted customers who are loyal and passionate advocates for the company. We have found that many conscious businesses spend as little as 10 to 25% of the industry average spending on marketing. This represents an enormous cost saving, at a time when marketing costs have been growing rapidly for most companies.
Conscious businesses typically operate with extremely low levels of employee turnover, thus saving greatly on new employee hiring and training. Turnover at The Container Store, a perennial on “best places to work” lists, is in the low single digits, in an industry where turnover often exceeds 100%. Employees at such companies are loyal, experienced, highly engaged and extraordinarily productive.
Such businesses take great care to hire people whose personal passions are aligned with the corporate purpose. At a time when overall employee engagement levels are shockingly low, conscious businesses have employees who are loyal, passionate, energetic, and creative. For them, their work is not just a job or a career, it is a calling. For example, REI is passionate about reconnecting people with nature, and all of its employees are outdoor enthusiasts for whom every day at work is deeply fulfilling because they get to help customers discover the joy and beauty of being with nature.
Conscious businesses have lower administrative costs because they continuously strive to eliminate non-value adding expenses, gathering ideas from their employees and suppliers about how to do so. They also look to control essential expenses such as health care costs, not through across the board cuts, but by devising creative ways to achieve win-win outcomes.
Conscious companies typically operate with much leaner management structures than do traditional businesses. They have created systems in which the right people are doing the right jobs and are given a great deal of autonomy. Most employees operate in the “value zone,” where they are actively creating real value for customers rather than “managing” each other. These companies are designed to be largely self-organizing, self-motivating, and self-managing.
Finally, conscious companies operate in a system of very high trust between all stakeholders, and thus their legal costs are much lower than the norm. They understand their customers deeply, produce outstanding products (due in no small part to the fact that they have world-class suppliers), and thus have much lower levels of product returns.
What about executive pay?
The notion of pay equity at such companies is driven more by internal rather than external considerations. Senior executives at such companies are modestly paid relative to their peers at other companies. For example, Whole Foods Market has adopted a policy that no one can be paid more than 19 times the average salary (the typical ratio at large publicly traded companies is 350-400 times). The only way for executives to earn more at such companies is to raise the average salary of all employees.
What do you say to critics who question this “consciousness”?
Like humans, no company is perfect, and some companies that we identified as conscious businesses have stumbled in recent years. These companies have only to rediscover their own essence in order to get back on track.
Even the most conscious individuals sometimes act unconsciously. This does not negate the value of being conscious. The test of a truly conscious business is its ability to learn and grow from such experiences, and to emerge even stronger and more committed to a conscious way of being.
How does a business become conscious?
Obviously it starts with the leadership. We invite business leaders to join us at our Conscious Capitalism CEO Summit in Austin in early October this year. It’s designed for pioneering CEOs who conduct their business by focusing foremost on fulfilling the deeper purpose of their organizations and creating value for all of their stakeholders. Readers can learn more at www.consciouscapitalism.org