A CEO's Plan to Save Capitalism

Last week, I introduced Whole Foods Market (Nasdaq: WFMI  ) CEO John Mackey's concept of "conscious capitalism." It's a holistic, long-term approach to running a business, with a focus on purposes greater than the blind pursuit of profits. Mackey thinks conscious capitalism could be an ideal way to fix capitalism's image problems and spur greater, more productive entrepreneurship.

Mackey's not condemning profits entirely; they motivate businesses to compete efficiently. And he's not suggesting that no business ever deserves to fail. But for Mackey, business isn't a war -- it's a web, connecting companies, employees, suppliers, and customers in a way that can ultimately help all of them.

Virtuous circles
According to Mackey, Whole Foods Market pursues a business model of "holistic interdependence." The company recognizes that stakeholders all rely upon each other, making its business more about synergies -- ways for everyone involved to win -- than trade-offs, in which only one party walks away happy.

Mackey discussed "the paradox of profits," arguing that profits are best achieved by not aiming directly for them. Self-absorbed, narcissistic people rarely find true happiness, especially if they act only for their own benefit. Similarly, companies that focus only on their own short-term profitability often destroy themselves by alienating, exploiting, and angering the stakeholders they require to survive: their employees, suppliers, and customers.

This may sound radical, but it isn't exactly a new concept. Ford's (NYSE: F  ) iconic founder, Henry Ford, came up with a profit-sharing wage plan, paying his employees well over the minimum wage. This meant they could afford to buy Ford's products, which would be good for both the company and the overall economy.

Today, Costco (Nasdaq: COST  ) also treats its employees famously well, giving the company a loyal, long-term workforce in an industry well-known for turnover. Among other benefits, encouraging workers to stay put reduces the expense Costco would otherwise incur to constantly train a steady flow of replacements.

Let's be friends, not frenemies
Whole Foods' collaborative web not only includes employees, customers, and shareholders, but also suppliers. Companies like Whole Foods can help small suppliers flourish against larger rivals; some have done so well that they've become coveted takeover targets for giants such as PepsiCo (NYSE: PEP  ) , Coca-Cola (NYSE: KO  ) , and Kraft (NYSE: KFT  ) . Sticking up for the little guy also helps keep Whole Foods' expenses low, since a market full of suppliers spurs competition, giving the company leverage to negotiate for the lowest possible prices.

Whole Foods also makes local loan programs to small businesses -- in 2006, the company pledged help to small farmers who sell locally grown produce -- and pursues its Whole Trade program internationally.

Get over it, shareholders
In Mackey's view, shareholders aren't conscious capitalism's No. 1 priority. By focusing more on keeping employees happy, companies will increase their odds of making customers happy, too. Happy customers mean greater revenue and earnings, which will ultimately make shareholders happier as well -- provided they can exercise a bit of patience.

Mackey also warned that corporate social responsibility initiatives are not the same as conscious capitalism. Such efforts are often intended at least partly for public relations, designed to please shareholders, not stakeholders. Too often, such campaigns are simply "greenwashing" -- halfhearted efforts that can drive away savvy, cynical consumers. In contrast, conscious capitalism means that a company's benevolent aims are built into its DNA.

It's best to stay conscious
Mackey thinks that the human mind is infinitely creative, and that conscious capitalism creates new pathways to unleash that creativity. I believe he's right. Tapping the resilience and resourcefulness of entrepreneurs, especially those with loftier aims than simply getting rich, will do more to restore our wheezing economy than any government program could.

You could argue that conscious capitalism has little to do with investing; personally, I think it has everything to do with it. Companies that exploit and infuriate customers, employees, suppliers, and shareholders ultimately make themselves big, slow-moving targets, just waiting to get clobbered by smart, principled businesses built for the long haul. In that light, unconscious capitalism could be a vice your investments simply can't afford.

Do you prefer your capitalism conventional or conscious? Got any great examples of conscious capitalism, besides Whole Foods? Feel free to share your thoughts in the comment boxes below, and for a firsthand introduction to the concept, check out our podcast of John Mackey's visit to Fool HQ.

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Costco and Whole Foods are Motley Fool Stock Advisor picks. Costco, Coca-Cola, and Wal-Mart are Motley Fool Inside Value selections. Coca-Cola and PepsiCo are Motley Fool Income Investor picks. The Fool owns shares of Costco. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool's disclosure policy gets along with everyone.


Read/Post Comments (8) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2009, at 5:47 PM, DDHv wrote:

    This sound solid. I'm going to pick up some WFMI next large dip. They may not succeed, but the odds improve when one is at least aiming toward the target!

  • Report this Comment On August 04, 2009, at 9:33 PM, thedofca100 wrote:

    How quickly we forget. Isn't this the same guy who:

    "Using the pseudonym Rahodeb - a variation of Deborah, his wife’s name - Mr. Mackey typed out more than 1,100 entries on Yahoo Finance’s bulletin board over a seven-year period, championing his company’s stock and occasionally blasting a rival, Wild Oats Markets, that his company later went on to buy. The story was first disclosed on The Wall Street Journal’s Web site last night."

    And this is the guy who is going to teach us all about "purposes greater than the blind pursuit of profits."

    Come on. Give us all a break with these guys who seem to talk one story while doing the opposite.

  • Report this Comment On August 05, 2009, at 1:03 AM, TimelessOne wrote:

    It is long past time when ignoring the inherent complexity could have been tolerated. Maximizing the short-term value for investors as if they were legitimate owners has been recognized as an inadequate measure for decades.

    For viable capitalism, it will be necessary to stop dumbing-down the requirements to a somewhat vague conceptual goal like "maximizing shareholder value" that would allow most any middle school dropout to function as a C-level exec, and go about playing the marketshare/finance/marketing game. As the content of annual and quarerly reports demonstrated, the markets were never intended to be so oversimplified.

    Teams can provide more than individuals, when operating well. Successful leadership should offer longer term results to investors and owners. Collaborative relationships with service, material, energy, and especially staff providers offer more opportunities than quick searches for poorly qualified least-cost supplliers and inappropriate outsourcing.

  • Report this Comment On August 05, 2009, at 11:57 AM, Savannahboy wrote:

    Alyce,

    I recall an article that you wrote "Where Milton Friedman Was Wrong" in which you condemned him for saying "There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits." I sent you an email (to which you didn't respond, incidentally) saying that you had missed Friedman's point. I contend that Friedman felt the same way as Mackey. Friedman's quote didn't say increase profits in the short term while sacrificing the future. Friedman understood as does Mackey in order to maximize returns for shareholders you had to think long term and all stakeholders should be treated well. I would appreciate it if you would rewrite the article on Friedman and reverse your criticism. Maybe even give him credit as you do Mackey. Speaking of Friedman, I would love to hear what he has to say about our current governmental policies including the health care reform package. I'm sure he is rolling in his grave, rest his soul.

  • Report this Comment On August 05, 2009, at 1:11 PM, JeffMowatt wrote:

    Today we have many models for fixing capitalism, 'Conscious Capitalism'' is one, others are Creative, Constructive and Compassionate capitalism.

    They have a common thread of doing business for "more than profit" and for most it's far more engaged that Henry Ford's employee incentive, or giving profits to charity.

    For another model, People-Centered Economics, it began back in 1996 with a white paper for an alternate, not a replacement business model to address the great inequities of the 20th century. In the blog below, I relate how the concept of a business, with the primary purpose of addressing a social problem evolved under radar on the web.

    http://www.ecademy.com/node.php?id=132188

  • Report this Comment On August 05, 2009, at 3:30 PM, ET69 wrote:

    I have heard this crap before from many employers. When push comes to shove and the profits are affected all the politically correct "feel good" nonsense goes out the window. Wages are cut, jobs lost and the bosses leave with their golden parachutes .His spiel is hardly worth commenting on except to say that if he really wants to help the masses of humanity maybe he can come out for ......you guessed it ....world wide SOCIALISM!

  • Report this Comment On August 05, 2009, at 4:18 PM, foxxx333 wrote:

    This article, and the comments, have valid points. None of them, however, address the nature of Capitalism. Capitalism's essence is the idea of voluntary transactions. In a voluntary transaction each party thereto achieves a benefit. How can this be? Because values are subjective. If I buy your product, I prefer (value it) more than the money with which I part. Correspondingly, you as seller would rather have (value) the money. This is in accord with human nature. Each of us has free will; each of us must choose what he values. This is the meaning of Jefferson's words: "among these rights are Life, Liberty and the Pursuit of Happiness". Liberty is your right (and responsibility) to choose your own values. The pursuit of happiness is your right to act in a way to achieve the values you have freely chosen. This is the philosophy underlying the economic system called Capitalism. In an economic sense profit is an indication to the entrepreneur that he is correctly judging the values held by others. Hence, his job is to bring satisfaction to as many others as he can. Correspondingly, losses indicate he is not doing a good enough job satisfying the needs of others. One should not discuss profit without discussing loss. Profit is good because it tells the entrepreneur he is bringing happiness to others. This fact explains why governments often fail, when they interfere in otherwise free markets. Since there are no profits or losses to be accounted, there is no standard by which to judge success or failure. In fact the typical reaction to a failed policy is to throw more money at the problem (raise more taxes on otherwise free citizens). This leads increasingly to more severe and onerous restrictions on our freedoms. Witness the current administration's resort to coercion to force its values on us. I would like to see more defense of profit as the rudder that will help steer the ship of State to a just and happy destination for us all.

  • Report this Comment On August 07, 2009, at 11:19 AM, dbwolfe2009 wrote:

    For all those cynics of conscious capitalism (and John Mackey) I suggest they ponder the chart in "Firms of Endearment" on page 138 which can be seen by going to Amazon.com, pulling up the book by title, and typing "G2G" in the "search inside" box under the book's image. The chart shows the 10-year, 5-year and 3-year performance of companies that follow the conscious capitalism gospel. Interestingly, their 10-year performance in equity markets far exceeded the record of Jim Collins' 11 "From Good to Great Companies." The record: CC companies increased shareholder value by a staggering 1023% vs. shareholder gains in Good to Great companies of only 331%. In that same 10-year period the S&P reflected increase in shareholder value of 123%.

    I recently received a report on how well the public companies in "Firms of Endearment" have weathered the current financial crisis. They have significantly outperformed the S&P 500. At a financial management firm I know of that manages 28 funds, the fund that is restricted to CC companies has out performed the other 27 funds since it was set up last Fall.

    I believe that John Mackey is one of the sharpest CEOs on the planet, and I firmly believe that Whole Foods' recent unexpected financial performance and where it is headed now support my confidence in John Mackey as a CEO of uncanny instincts. The same holds true for most of the other CEOs of companies cited as exemplars in "Firms of Endearment."

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