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Is Conscious Capitalism A Conceptual Mess?

Posted on July 23, 2013 by David

Conscious Capitalism (CC) is featured prominently in the latest issue of the California Management Review (CMR) (Spring 2013, Vol. 55 No. 3.). In an article entitled “Conscious Capitalism Firms: Do They Behave as Their Proponents Say?”, Chong Wang, an Assistant Professor at the Naval Postgraduate School in Monterey, California challenges the “scientific status” of the theory of conscious capitalism. Using a sample of 17 CC firms he compared their results with a matched set of non-CC equivalents against several distinguishing criteria developed by the proponents of CC.

Professor Wang tested four assertions. These were that, compared with non-CC firms, CC firms have:

Lower gross margins (gross profit as a percentage of sales)
Higher profit margins (net income as a percentage of sales)
Lower selling, general and administrative (SG&A) as a percentage of sales
Lower marketing costs (advertising expenses as a percentage of sales)

In his findings he rejected #1 – CC firms have higher gross margins than their non-CC rivals, a finding that should not surprise anyone who has ever shopped at Whole Foods! He found support for #2 – CC firms have fatter bottom lines. He could find no evidence to support assertions #3 and #4. He developed an analysis that suggested that CC firms were no less attentive to the stock markets than non-CC firms; they managed their earnings just like their non-CC rivals. In short, Professor Wang questioned the entire conscious capitalism narrative, including how firms were selected as being members of the group.

Professor Raj Sisodia responded to this criticism in the same issue of CMR. He stated that CC proponents have now developed a deeper understanding of CC firms. The “single greatest driver of superior financial performance for highly conscious businesses is their ability to generate superior sales volume on a given asset base.” CC proponents now agree that many CC firms have very healthy gross margins but that they don’t “consciously seek to maximize” them. He went on to argue that operating efficiencies of CC firms are subtle and cannot be detected by the study of publicly available numbers whose expense categories are too gross. As for guidance given to stock markets and earnings management, Professor Sisodia seemed to concede Wang’s critique but argued that it was “largely peripheral to our arguments” and he contended that CC “is a robust philosophy that is deeply attuned to the exigencies of the times which we live in.”

While agreeing that publicly-available data permits limited analysis, I must confess that Professor Sisodia’s commentary came across to me as unpersuasive and designed to “save the appearances” of the CC theory/philosophy/paradigm. In a Response to the Commentary (in the same issue) Chong Wang was withering in his criticism. He applied philosopher Karl Popper’s criteria for a scientific theory – refutability, consistency, and general applicability – to CC and concluded that it met none of these tests, seriously diminishing “the scientific status of CC theory.” More importantly, he questioned why, if CC is such a superior business paradigm, it is not being more widely adopted and challenged Sisodia’s claim that the degree of attention given to managing earnings by CC firms was peripheral to the CC model.

A Conceptual Muddle

It’s pretty clear that CC is in a real conceptual mess. It’s not a “scientific theory”, at least according to management scientists like Chong Wang, and, as I have argued elsewhere, it is not a paradigm. Sisodia calls CC a “philosophy” but he seems to use the word in a casual way, without suggesting any ontology, epistemology or methodology. It sounds more like a perspective than a philosophy. In reality what we call “conscious capitalism” is a practice, a variation on the set of practices that we call “management”. We need to understand what “it” is in practical terms; how it begins and the circumstances under which it can flourish and be sustained. Effective managers don’t care whether a practice is based on “scientific” theories; they just want to know whether it works in a sustainable, cost-effective way.

So what is to be done? Anyone trying to change the way we practice management faces a wicked problem with multiple roots and complex causes. One of problems is that the attempt to apply science and the scientific method to management problems has gone far beyond its legitimate boundaries. Aristotle, the father of the approach, always contended that his analytical methods could be applied only to things that “cannot be other than what they are” i.e. things that don’t change – objects. Today we would extend that boundary to include things that change in predictable ways – machines. But in the late 1950s management science set out to make the behavior of people predictable so that the scientific method could be applied to them. In theory this meant the adoption of “as-if” assumptions like the economists e.g. that people are rational utility-maximizers. In practice it meant creating contexts in which people would behave in predictable ways e.g. in organizations by using the control systems and processes of top-down hierarchy, and in the population at large by using mass advertising and the full spectrum of influence techniques.

As everything grew in the post WWII period this approach seemed to work for a while – the hope grew among academics that perhaps management could indeed become a “science” – but as growth faded and the need for innovation became apparent, the flaws of an approach that regarded technology and creativity as “exogenous” to the system became clearer.

Humans are reflective creatures and fundamentally dislike being treated either as objects or as machines. As the unwritten contract between corporations and their employees broke down, their behavior became more and more dysfunctional. The result was Anglo-Saxon capitalism in its present pickle, with practices like conscious capitalism being hailed as a way out. Unfortunately that’s not going to work; the roots of the problem are far too tangled and deep. We need to go back to our basic assumptions about human nature and the human mind. We need a framework that can embrace and contain the technical rationality of management science in a matrix of values that reassert the existence of boundaries between what Max Weber called zweckrationale and wertrationale. As readers of this blog will know, I believe that an ecological perspective is a good place to start.