Conscious Capitalism. John Mackey

John Mackey and Raj Sisodia return capitalism to its roots. They make a compelling case for capitalism as the greatest wealth creator the world has ever known. In these pages, they call their version conscious capitalism. I consider it just capitalism, as it is the only authentic form of capitalism. Other forms of doing business, including “crony capitalism,” are simply inauthentic versions of the real thing. As we witnessed during the global economic meltdown of 2008 and the Great Recession that followed, these false versions of capitalism cannot be sustained and are doomed to fail over the long term.

      I first discovered John Mackey’s philosophies when I read his 2005 debate with Nobel Prize–winning economist Milton Friedman about the way capitalism works. Shortly before Friedman’s death, Mackey challenged his view that the only responsibility of business is to its shareholders, which financial markets have translated into its short-term stock price. In his widely quoted 1970 treatise in the New York Times, “The Social Responsibility of Business Is to Increase Its Profits,” Friedman excoriated business leaders who were concerned about their employees, communities, and the environment: “Businessmen that take seriously their responsibilities for providing employment, eliminating discrimination, avoiding pollution … are preaching pure and unadulterated socialism.”

      Mackey challenged that view, just as I have tried to do for many years. We share a much broader view of the role of the corporation in society. It was society that chartered the limited liability corporation and granted companies the right to operate. Violating those rights can result in loss of freedom, either by revoking a company’s charter or restricting it with regulatory actions and laws that limit its freedom to operate.

      In his leadership of Whole Foods Market, John Mackey has become a role model for conscious capitalism just as my Medtronic colleagues and I have tried to be. From our personal experiences of being in the trenches every day—Mackey in his stores and my time in hospitals with physicians and patients—both of us know that authentic capitalism is the only way you can build an organization that benefits its customers, employees, investors, communities, suppliers, and the environment.

      Mackey and Sisodia demonstrate unequivocally that leadership matters. They show us how to become conscious leaders, a notion that is virtually synonymous with my concept of authentic leadership. They recognize how essential it is for leaders to integrate their hearts with their heads by developing self-awareness and emotional intelligence, while empowering other people to do the same. As the saying goes, “The longest journey that people must take is the eighteen inches between their heads and their hearts.” With the enormous loss in confidence in our leaders in the past decade, developing conscious leaders is the best way to rebuild trust in our leaders and in capitalistic institutions and to ensure that they follow their True North.

      Let me share my journey to my embracing these notions. By the time I graduated from Georgia Tech in 1964 in industrial and systems engineering, I had a passion to become a values-centered leader of a major company that contributed to the welfare of society. This passion started with listening to my father talk about how businesses should be operated at the age of eight. It continued into my teen years as I heard conversations with businesspeople while caddying and later at summer jobs for companies that included Procter & Gamble and IBM.

      I chose business because I believe that well-run, values-centered businesses can contribute to humankind in more tangible ways than any other organization in society. My MBA studies at Harvard Business School exposed me to many great business leaders, opened my eyes to how global business operates, and strengthened my desire to make a difference through free enterprise. In my twenty-three years at the Department of Defense, Litton Industries, and Honeywell, I saw the good, the bad, and the ugly of business.

      Joining Medtronic in 1989, I recognized the opportunity to create lasting value for all the company’s stakeholders while sustaining its success. My thirteen years at Medtronic provided the platform, one well established by founder Earl Bakken, to turn this concept into reality. Some would cite Medtronic’s increase in shareholder value from $1.1 billion to $60 billion as evidence of its success, but I believe a much more compelling case comes from the increase in new patients restored each year to fuller life and health from 300,000 people in 1989 to 10 million today. The healing stories of these patients are the real reward for Medtronic employees and the doctors, nurses, technicians, suppliers, investors, and communities that make up the Medtronic family.

      Since retiring from Medtronic in 2002, I have taught at great academic institutions, most notably serving the past nine years on the Harvard Business School faculty. These years have enabled me to develop and solidify my ideas with gifted business scholars and great business leaders, discuss them in the classroom with remarkable students and executives, and write about them in five books and numerous articles.

      Meanwhile, society has experienced an historic loss in trust in business leaders. Understanding what has happened to undermine conscious capitalism in the last decade requires going back to Friedman’s theories, which have had monumental influence on generations of economists and CEOs who have followed his philosophy, unwittingly or not. The influence has grown as the stock market has become increasingly short-term and as average holding periods for stocks have fallen from eight years to six months.

      Most regrettably, the drive for short-term gains has led to the destruction of many great companies like General Motors and Sears and the bankruptcies of Enron, WorldCom, Kmart, and Kodak, and more than one hundred large companies that were forced to restate past financial reports in 2003–2004 because of questionable accounting. These problems pale in comparison with the 2008 failure of major financial firms like Fannie Mae, Bear Stearns, Lehman Brothers, Countrywide, Citigroup, and scores of others, as overleveraged financial institutions collapsed while trying to maximize their shareholder value. In effect, Wall Street’s pressure on corporations to increase short-term stock prices boomeranged, knocking out many of those same financial firms.

      John Mackey, who calls Friedman “one of his heroes,” challenged the economist’s ideas in their 2005 debate, shortly before Friedman’s death. To his credit, Friedman tried to incorporate many of Mackey’s ideas into his theory of shareholder value creation, but Mackey pushed back: “While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, I take the exact opposite view: Making high profits is the means to the end of fulfilling Whole Foods’ core business mission. We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can’t fulfill this mission unless we are highly profitable. Just as people cannot live without eating, so a business cannot live without profits. But most people don’t live to eat, and neither must businesses live just to make profits.”¹

      I often made a similar argument about Medtronic’s mission to “restore people to fuller life and health.” In my first book, Authentic Leadership, I presented the case that business should start with its purpose and its values and use them to inspire employees to innovate and provide superior service, while creating sustainable increases in revenues and profits. This approach provides the basis for ongoing investment in the business while creating lasting value for shareholders and stakeholders—leading to a virtuous circle. This philosophy is not unique in any way to Whole Foods and Medtronic. It is widely practiced at such diverse firms as IBM, Starbucks, Apple, Novartis, Wells Fargo, and General Mills, all of which have sustained great success for decades.

      In Conscious Capitalism, Mackey and Sisodia walk the reader through every constituency that corporations serve, including some like labor unions and activists, which are normally considered hostile to the company’s best interests. The authors demonstrate why and how these organizations deserve attention and respect, even when there are ongoing disagreements.

      To economists, Friedman’s much simpler calculation of shareholder value is easier to compute and measure, but it fails to represent the more important long-term elements of the company’s health, the validity of its strategy, the merits of its investments, the satisfaction of its customers, and the commitment and engagement of its employees. These factors have far greater impact on a company’s long-term, sustainable value than does its short-term stock price movement. Other leading scholars, such as my Harvard Business School colleague