Real Leaders

Conscious Capitalism: A Way to Greater Action And Dignity

We are living in a time of great paradox. To paraphrase Charles Dickens, “These are the best of times; these are the worst of times.”

At one level, things look great economically. President Trump has been touting the fact that the stock market is at an all-time high, and we have nearly full employment, with the unemployment rate just above 4%. But dig below the surface, and signs of distress are everywhere. In fact, you could say that we have an epidemic of silent suffering in this country. The majority of working people—even those with full-time jobs—live lives of quiet desperation, perpetually skirting the edge of disaster. But most people are stoic and heroic as they uncomplainingly deal with their tremendous challenges.

If you like this, subscribe here for more stories that Inspire The Future.

Here are some sobering facts. According to the National Bureau of Economic Research, 50% of Americans would not be able to raise $2000 within 30 days, if faced with a crisis of some kind. They cannot turn to friends, family or their employer for help. Another stunning fact: 60% of American households are technically insolvent and going deeper into debt every year. That means that they have a negative net worth; their liabilities exceed their assets. They are bankrupt without having declared bankruptcy. Forget about planning for retirement; how will they get through next year or survive a bump up in our historically low interest rates?

We live in a time of significantly reduced physical violence, but escalating psychological suffering. Some 40 million Americans suffer from debilitating anxiety. There has been a 24% rise in suicide rates over the past 15 years. Nearly 100 Americans die every day just from opioid overdose, adding to the half million who have died in the last 15 years.

Where did we go wrong? After all, the US is often cited as the wealthiest country in the history of the world. That bounty has been the direct result of our full-bodied embrace of capitalism. We are the only country ever founded on a set of shared ideas, all of which revolved around freedom and dignity for ordinary human beings. Capitalism—free markets and free people—has propelled humanity over the past 200 years to rise to unprecedented heights of material and technological achievement. Per capita incomes have increased 1,500% in real terms, after being flat for millennia.

The percentage of people living in extreme poverty (now defined as $1.90 a day) has fallen from 90% to 9% since 1800. Life expectancy has more than doubled. Literacy has gone from 12% to 88%. So there is much to appreciate and much to be thankful for when it comes to capitalism. It is a system that is capable of promoting flourishing for ordinary human beings, not just for business owners. It is an extraordinary tool for social advancement and collective action. It may be the most powerful idea we human beings have ever had.

But it is not working for most employees nearly as well as it needs to anymore. An estimated 88% of Americans work for companies that they believe do not care about them as human beings. Heart attacks are at least 20% higher on Monday mornings. Our work has become a great source of stress and distress for most of us and is the most significant driver of chronic diseases and our spiraling healthcare costs. Employee engagement, according to Gallup is just 30% in the United States, which happens to be among the highest in the world. Globally, only 13% of employees are engaged in their work.

As James Baldwin once said, “Not everything that is faced can be changed. But nothing can be changed until it is faced.” Here is the reality that we need to face: the way we work is not working anymore. Work is central and fundamental to the human existence. We can derive meaning from it and leave a lasting legacy through it. But for the vast majority of us, work is something to be endured, with untold amounts of unnecessary and unaccounted for suffering–all for measly rewards.

A significant turning point in how we practice capitalism came in the early 1970s when the mantra of shareholder value maximization became central to business. This further “normalized” the treatment of people as mere functions and objects, as costs that need to be minimized, as liabilities instead of assets. The natural extension of this came in the 1980s, when companies for the first time started using mass layoffs, not as a last resort to ensure the survival of the business, but as a way to fix the numbers and bump up the stock price.

The sad irony is that shareholder primacy has coincided with an era in which companies are steadily making poorer returns on their invested capital. The data show a long-term and steady decline since the early 1970s to the present; economy-wide return on assets has fallen from approximately 4% in 1965 to just over 1% in 2015. In other words, the idea of maximizing shareholder returns is failing even on its own terms. This is the paradox of profits, analogous to the mystery of happiness: the more you pursue it directly, the less you are likely to realize it. Instead, we need to focus on the things that lead to happiness and which result in profitability. These all revolve around caring about people.

If you like this, subscribe here for more stories that Inspire The Future.

So why does this harmful and dangerous mindset persist? Why does it remain unquestioned dogma in boardrooms and business schools? Many bad ideas do catch on, especially if they enable some people to make a lot of money. As Upton Sinclair wrote, “It is difficult to get a man to understand something when his salary depends on not understanding it.”
The story gets darker still. Even as returns have become worse, executive compensation has exploded. As Roger Martin writes in his book Fixing the Game, “In the decade from 1980 to 1990, CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled.” That is an eightfold increase from 1980 to 2000.

What was happening with ordinary workers as executive compensation skyrocketed? From 1978 to 2013, worker pay increased 10%, while CEO pay increased 937%.
So returns are declining as executives obsess over profit maximization. They try to squeeze our profits from the business by squeezing their employees and suppliers while externalizing many burdens on to society and future generations. Almost all those profits are then delivered directly to shareholders. From 2003 to 2012, 54% of profits have gone to share buybacks. This is a way of propping up the stock price without actually improving performance, as the number of shares outstanding decreases and thus earnings-per-share increases.

This directly benefits existing shareholders, but even more so, it benefits executives with large amounts of stock and stock options. Those stock options can be worth nothing if the share price doesn’t meet a specific target but can be worth millions if the share price exceeds the target price by even a small amount.

In addition to the 54% of profits going to share buybacks, another 37% goes to paying dividends. That’s 91% of profits directly benefiting shareholders. That leaves a scant 9% of profits available for reinvestment in the future of the business or for its people. How is this acceptable? It appears that the institution of capitalism has been hijacked and made to operate in a way that disproportionately rewards some while failing to treat others with dignity, care and respect. This is the stuff from which revolutions spring. It should worry us greatly. As Peter Georgescu, Chairman Emeritus of Young & Rubicam writes in his new book Capitalists Arise!, “For the past four decades, capitalism has been slowly committing suicide… The rules of the game have become cancerous. They’re killing us.”

To quote James Baldwin again, “it is not permissible that the authors of devastation should also be innocent. It is the innocence which constitutes the crime.” Business leaders have a lot to answer for.

Just before the Great Depression, US President Calvin Coolidge said, “The business of America is business.” In many ways, this statement was accurate; after all, this country was founded on the entrepreneurial energy of free individuals. But it begs the question, “What is the business of business?” Alford P. Sloan, the legendary Chairman of General Motors from 1937 to 1956, said, “The business of business is business.” Similar words were echoed by the economist Milton Friedman in 1970. The implication is clear: business need only be concerned with pursuing its own purpose of maximizing profits. But a more expansive and humanistic view was offered by Herb Kelleher, the extraordinary leader who built Southwest Airlines into the most successful airline in history. He said, “The business of business is people—yesterday, today and tomorrow.”

Kelleher points to a fundamental and foundational truth that most in the world of business have lost sight of. Ultimately, all human activity needs to be about human and planetary flourishing, today and forever more. All other aspects of business, including profits, are a means to that end. This is what we need to recommit ourselves to. Human beings need to be at the center of all human activity. We are not to use them, abuse them or exploit them for personal gain. We are to serve them.

Our long-running abuse of capitalism does not come without a price and a huge flashing warning sign. Approximately 40% of Americans now prefer socialism to capitalism. According to Gallup, 55% of Americans below the age of 30 “have a positive view of socialism.” Another study found that 51% of Americans under 30 do not support capitalism. This should scare the living daylights out of us.

Jonathan Haidt frames the choice between capitalism and socialism as one between dynamism and decency. Socialism promises but has never actually delivered fundamental decency. It is rooted in a romantic vision of meeting our basic needs with egalitarianism and fairness. As we well know from the bitter history of the last century, the socialist dream led to stagnation and untold suffering for billions of people. On the other hand, capitalism promises and largely delivers on the idea of dynamism. It has fostered extraordinary amounts of innovation, and alongside it, creative destruction, as new products and ideas continually replace ones rendered obsolete.

For too long, humanity has been offered a binary choice between one or the other: dynamism or decency. This was the defining debate of the 20th century. But this is a false choice that we should not have to make. It is like choosing between breathing in and breathing out; we need both. We must have dynamism; without it, we will not survive. In the next century, we will have to reinvent the way in which we meet almost all of our needs, and we will have to do that for close to 10 billion people. Without dynamism, we will inevitably perish. But this dynamism needs to be accompanied with real decency, where human beings are enabled to live lives not only of material well-being but also of emotional and spiritual well-being through their work.

This is the great promise and potential of Conscious Capitalism: greater dynamism than traditional capitalism, along with genuine decency for human beings. Conscious companies are more innovative, more creative and far far more engaging as places to work. These companies create many kinds of wealth and well-being for all of the stakeholders: financial, intellectual, social, emotional, spiritual, cultural, physical and ecological. They do so without generating any adverse side effects, or the so-called externalities that traditional businesses inevitably create. This way of being exists, therefore we know it’s possible. We know how to do this, we know why we must do this, and we know that we need to make this transition now. It is later than we realize.

Doctors who treat their patients with faulty or obsolete medical knowledge get sued for medical malpractice. Leaders who do not embrace a humanistic, people-centered approach to business are likewise guilty of malpractice and need to be held accountable for that. Doing business the old way is a failure of imagination and a reflection of grotesquely misplaced priorities.

If you like this, subscribe here for more stories that Inspire The Future.


Most Recent Articles