What is the role of a company? Two schools of thought, two rival philosophies, have vied for supremacy for over twenty years now. Is it to put the interests of shareholders above all else, as Nobel prize-winning economist Milton Freedman declared? Or is it, in addition to the shareholders, to serve other stakeholders such as staff, clients, suppliers and beyond?
Today it is this second theory that holds sway. Consciences have awoken and corporate social responsibility, benchmarks and policies, environmental and social governance are prevalent among investors and companies. What’s more, these concepts have even found their way into the law books.
Behind this profound shift in thinking is the visionary entrepreneur and founder of Whole Foods, John Mackey. He opened his first organic foods supermarket in 1980, which 35 years on has a turnover of $13 billion. Competing against Walmart, the success of Whole Foods cannot be attributed to its organic produce alone, but is largely due to the creation of an entirely new business philosophy: the conscious and accountable company. In 2007 Mackey shared his vision in a book entitled Conscious Capitalism, in which he outlined the keys and principals of managing a conscious company.
In 1970 Milton Friedman, future Nobel Prize in Economic Science winner, declared that the only purpose of company was to maximize profit for shareholders. His comments came against the backdrop of the Cold War, where every concession made by a company toward its staff and wider society was seen as a dangerous step toward communism. In this context, any philanthropic use of company funds could be painted as a misuse of company assets, as the function of a company, lest we forget, was to maximize profit.
In 1984, Edward Freeman was among the first to go against this notion. He published Strategic Management: A stakeholder Approach, in which he showed that a company could be better run by actively taking into consideration its stakeholders. In 1995, Muhamad Yunus, founder of Grameen Bank, the first-ever ‘bank for the poor,’ inventor of microcredit and subsequent recipient of the Nobel Peace Prize, coined the term conscious capitalism. Michael Porter, the eminent Harvard Business School professor, drew on these earlier works for his concept of ‘shared value capitalism.’
In 2005, Whole Foods founder John Mackey faced off in a debate with Milton Friedman on the purpose of a company, which did more than anything that came before to advance the cause of conscious capitalism. Mackey then went on to share the foundations of the success of his company by publishing Conscious Capitalism: Liberating the Heroic Spirit of Business. What, then, are the pillars of such a company?
The four pillars of a conscious and responsible company
The conscious company rests on four pillars, philosophical as much as practical, which need to be synthesized and analysed. The first is that the company must target purpose before profit. Profit is a means to an end, purpose is a more profound goal. Two things must steer the direction of a company: the maxim ‘purpose before profit,’ and its fundamental values.
The second is the company should be organized in such a way as to maximize value creation with and for the stakeholders (staff, suppliers, clients, etc.) This involves a different organization.
The third is that there needs to be conscious leadership involving the director and his team of managers in order to bring about this value creation and assure systematic balance in the short and long term.
The fourth pillar is based on the ‘culture of the conscious company,’ One needs to sustain the model of value creation by ‘encoding’ it in the organization of the company and in its processes, notably when it comes to recruitment and promotion.
1. First principle: ‘purpose before profit’ involving identifying your purpose and core values.
Every company has an objective, implicit or explicit, short term or long term. Nevertheless verbalising a raison d’être (purpose) gives it ‘constitutional’ direction, and a moral compass. This purpose, this guiding star, can point the way in times of trouble. Above all, the clear-cut assertion of a purpose brings three positive impacts: it unifies effort, beyond the confines of job description or products. Next, it gives a company strength of purpose and the deep motivation that this unleashes. And lastly, it facilitates the prioritization of each person’s tasks.
When a company rallies around a higher purpose, a vision, all its teams advance more quickly, propelled by a clarity of objective and increased energy. This clarity of objective can provide the inspiration for more daring decisions, disruptions or reassessments that bring efficiencies and direction.
In addition, it is not just investors or staff that see their engagement grow, but clients, suppliers, the media, and all of the ecosystem that organizes its activity around its identity and purpose. The purpose must be genuine and give the company its own identity. It cannot be seeking to maximize profits, which is a means, but not an end in itself and has no distinguishing feature. Leading a company toward a higher purpose will be the source of happiness. In effect, happiness does not reside in a succession of hedonistic pleasures, as demonstrated by the celebrated Austrian psychologist Viktor Frankl, but rather comes from a life full of meaning, one with a noble objective. In making its purpose public, a company will more easily attract people who are intrinsically motivated, by, or even passionate about, the same principles. It allows others to discover a cause worth investing in, individually and collectively. To arrive at a purpose, John Mackey recommends using various inspirational questions as levers: ‘Why does our company exist?’ ‘What good does it do?’ ‘What difference do we want to make?’
What’s more, if there is heroism in the purpose of a company, it can succeed in changing the world for the better, it can succeed, by the power of a collective dream, to awaken the heroism in each of us. Mythical successes of Silicon Valley (Steve Jobs and the personal computer then the smartphone, Elon Musk and Space X, etc.) illustrate the merits of this approach. One must have the courage to demand going beyond narrow personal preoccupations by tapping into universal aspirations.
Finally to unite the company and its diverse internal and external stakeholders, the core principals of the company must be clearly defined and respected. This ‘moral constitution’ this social contract will unite and elevate everyone, in terms of performance as well as job satisfaction and motivation. It helps bind together an organization, reduces internal strife and gives direction to the stakeholders, who advance more harmoniously.
2. Second principle: stakeholder integration
The stakeholders are all the forces that exert an impact on a company, as well as those the company has an impact on. The conscious company identifies and respects them, because it understands their level of interdependence. It intuits and understands the common objective: optimizing value creation for all stakeholders.
From then on, it builds and manages the ecosystem in a way that creates the most value. Where conflicts arise, notably in the sharing of values, being conscious prompts the search for win-win situations and not shaky deals, or those based on the power balance. Solutions where value is shared, thanks and with to respect creativity, should aim to achieve a harmony of interests, even long-term ones. Without this, the business model will be unstable.
Key question: Is satisfying the needs of the main shareholders a means to an end, or a goal in and of itself? Here, conscious companies see things differently from traditional ones.
Stakeholders include clients, staff, investors, suppliers and distributors. But one also needs to take into account other stakeholders, such as competitors, the government, society, the local community and the environment.
If a company’s function is to wring out every ounce of value by throwing its weight around (with suppliers, staff, the environment, etc.) rather than to ‘create,’ the business model is neither healthy nor sustainable. Another trap: some investors encourage a company to boost its profits in the short term. But ‘value extraction’ is the antithesis of ‘value creation’ for the company’s ecosystem.
It must go against a company’s conscience to allow stakeholders in positions of power (investors, staff, clients) to siphon off too much value, and destabilize the company and its relationships with other stakeholders.
Management must assure the balance that make the unity and harmony of the system possible. It must ensure fair relationships, the sustainability of the business model and promote a mode of sharing value that creates a virtuous circle. If each stakeholder is treated with respect, with care, ‘like a member of the family’ even, they will be prepared to play their part when the going gets tough, to make sacrifices, and even act heroically for the greater good of a company which they respect. Thus, when a flood ravaged While Foods’ first - and at that stage only - store, clients and suppliers, as well as banks and investors, rolled up their sleeves (and rolled out lines of credit) to save the company because they truly wanted it to bounce back.
Staff and investors are two particular kinds of stakeholders. Some even label them ‘constituent parts.’ Workers are the human capital of a company: discerningly recruited, well trained and engaged in relation to the mission of the company. They are its beating heart. The money of investors is certainly at work every day, but for diversified and liquid investors (listed companies) focus and engagement can be weak. On the other hand, staff are engaged each and every day, physically and mentally, in their role. They are not ‘resources,’ but rather, sources.
This fundamental difference is summed up well by John Mackey: “A resource is like a lump of coal; you use it and it’s gone. A source is like the sun – virtually inexhaustible and continually generating energy, light, and warmth. There is no more powerful source of creative energy in the world than a turned-on, empowered human being.”
The foundation of lasting and fair relationships and also the main facilitators of relationships with other stakeholders, staff need to be inspired and interested by, and even passionate about, their company and its purpose, whether in their dealings with investors or stakeholders in the outer circle (the environmental community, suppliers, the media, the government… even the competition). At Whole Foods a ‘declaration of independence’ made aware that the future of the company would be built together with its ecosystem.
3. Third principle: conscious leadership
Businesses need missionary leaders, not military leaders. Conscious companies are animated (from the latin animus = the soul) by leaders with strong emotional intelligence, but also a spiritual, that’s to say, true emotional intelligence. A company needs leaders replete with ‘masculine’ qualities (ambition, competitivity’) and those ‘feminine’ qualities (kindness, compassion, cooperation) related to the right side of the brain. Leadership and management are not synonyms: Leaders are driven to bring about complex tranformations, to construct and renew. Managers concern themselves with efficiency and execution.
Another characteristic. Leaders are given to systematic thinking, which allows them to envisage something that does not yet exist, which people say is impossible. Leaders need great managers in order to carry out their vision because the balance between the two roles is vital.
“Excessive management without leadership leads to great instability, to self-absorption. Excessive leadership without sufficient management is equally as dangerous,” explains John Kotter.
The aptitudes of great leaders reside in their integrity, capacity to make others better, to rally them around a shared objective, to give meaning and make the hard moral decisions. Leaders know how to control fear, internal and personal as well as collective, by their calm demeanour, their decisions, and to instill confidence in every situation. Goodwill toward and affection for their teams and the cause are a powerful guide.
4. Fourth principle: conscious culture and management
Peter Drucker attests that “culture east strategy for breakfast,” as a way of underlining that a strategy which is not aligned with the culture of a company has little chance of success. “Culture is a powerful, invisible force and must be managed with great care,” stresses John Mackey. It’s “the single biggest factor of coercive persuasion in a company,” underlines Edgar Schein a leading figure in organizational development.
In codifying its values and key processes (targeted recruitment, annual evaluations, policy regarding promotions, etc.) the board of directors can construct an affirmed culture rather than an implicit one, which becomes a real element that sets the company apart. Conscious cultures promote decentralization, recognition and teamwork.
All seven characteristics of conscious cultures have one point in common: they generate positive energy. First, trust, internal and external, horizontal as well as vertical. Second, responsibility – the foundation of trust – allowing delegation, autonomy: everyone knows others in the firm will keep their promises. Third, attentiveness, which builds strong ties between the stakeholders. Fourth and fifth, transparency and integrity are fundamental: excusing errors of judgement, but not cover ups or serious moral lapses. Sixth axiom, loyalty is a corollary of a strong ‘interpersonal mindset,’ which fosters engagement, especially in times of difficulty. Finally egalitarianism, the right to be respected, to be different, which helps avoid all class systems separating directors and employees.
The board of directors of a company, just like the staff, after having pointed the way by spelling out the company’s purpose, must develop its apparatus, meaning the structures, processes, business models and strategies that will allow it to function as a conscious company, creating increased value with the efforts of stakeholders. Several studies have shown that conscious companies perform better financially over 5, 10 and 15 years, notably the work Firms of Endearment: How World-Class Companies Profit from Passion and Purpose.
To conclude with a smidgen of humor and wisdom, one might say that the conscience is 45 centimeters long: the distance between the head and the heart. Directors must unite their heart and their head through emotional intelligence. Forty-five centimeters is the longest, but also the most beautiful distance that a human being can cover.
This dossier and the above text owe a debt of gratitude to the inspirational teams at Leaders League. These writings are also the fruit of my personal experience as founder and CEO of Leaders League, where we make sure to be conscious and responsible each day. Lastly, the book Conscious Capitalism, was a major inspiration, and which deserves enormous credit and to be widely read by directors and managers. It deserves to be in your pantheon of legitimate sources of transformation, due to its combination of inspiration and practical advice. A book which nourishes the heart and mind and the power to act to change the world.