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Why Conscious Capitalism is Not a New Paradigm

Posted on January 22, 2013 by David

Last week I blogged about my exchange with Steve Denning about conscious capitalism and his claim that it is a “new paradigm” for management. This week I want to discuss the ecological perspective on conscious capitalism and why it is better seen as a phase in the development of an ecosystem and the benefits of looking at it in this way.

So what is conscious capitalism? In their description of it in a 2011 article in the California Management Review, James O’Toole and David Vogel identify five features common to firms that practice it:

Higher Purpose: Profits are viewed as the means to some greater end, but not as the primary goal of a business.
Stakeholder Orientation: The companies commit to meet the legitimate needs of all their organizations’ multiple stakeholders.
Integrated Strategies: They integrate their ethics, social responsibility and sustainability practices into their core business strategies.
Healthy Cultures: Internally, their organizational cultures manifest a strong sense of “community”.
Values-Based Leadership: The Chief Executives of these companies typically are “servant-leaders” rather than celebrities.

Their article is entitled “Two and a Half Cheers for Conscious Capitalism”. While they applaud the efforts of business leaders to create a new model, they say that they are “skeptical of the (business leaders’) claims that their practices will, or can, be more widely adopted, let alone bring about the kind of social and environmental transformation of American business (and world society) that its advocates and adherents envision.”

A Static Perspective

To address the relationship between virtue and profits they develop a 2×2 matrix:

Categories of Business Activities

The green cell in the top-left is “zone of opportunity” for conscious capitalism and, if all business activities fitted into it, the advocates of conscious capitalism would have a strong case. Unfortunately, O’Toole and Vogel write, most business activities fall into the yellow and blue cells – profitable but not virtuous and virtuous but not profitable. Firms may be able to adopt some virtuous practices but this will not necessarily move their business into the green cell. Some businesses may never be profitable; the authors cite the decision of Merck to develop and distribute free of charge a drug to cure river blindness as an example of how the values of managers and the culture of an organization can affect such decisions.

An Ecological Perspective

2×2 matrices are fine for a static analysis of where business activities fall but an ecological perspective can be really helpful in understand how they change over the lives of firms and technologies. Here is an ecological perspective of the development of the relationship between virtue and profit:

The Ecological Development of Enterprises

From an ecological perspective, enterprises are conceived in passion, born in communities of trust, grow through the application of reason and mature in power. This means that their purposes and their methods also change as they grow. Most of them start off virtuous (attempting to do something of value for the community) but they are unprofitable (blue box). Most of these ventures either fail here or become “lifestyle” businesses, that is, they supply a basic living in return for an acceptable life style. They are not profitable in the economic sense of that term. Successful firms will grow in size and become both virtuous and profitable (green box). As they grow larger they will find that they need to become modular (specialized) and stratified (hierarchical) to handle that scale. People will be hired increasingly because of their technical skills and relevant work experience, which means that it will be increasingly difficult to ensure that they also believe in the organization’s mission. Over time the original mission of the firm will be forgotten – it will be profitable but not necessarily virtuous (yellow box). What has been a productive hierarchy slowly morphs into a dominance hierarchy. The rules and procedures that once enabled independent learning and action become coercive policies that crush initiative and engagement. People slowly become instruments of the firm’s power – means to another’s end, not ends-in-themselves. As the fervour of founders recedes into memory, then, there is a general tendency for the means to become ends-in-themselves.   The shareholder value model, which has risen to dominance over the past forty years, is a good example of this insidious process. As more time passes, the firm’s products will become commodities, its technologies will become outdated and it is likely to become both less virtuous and unprofitable (red box), setting the stage for crisis and fragmentation.

Dwelling in the Sweet Zone

In some ultimate, abstract sense, this process is inevitable, but in practice there is much that can be done to delay the process and to dwell in what I call the “sweet zone”. The complexity theorists call it “the edge of chaos”; the Japanese call it “ba” – “a moving context in space and time where knowledge is created and shared.” This is the virtual space where the enterprise is continually on the move, searching for and taking advantage of new connections between its ends and its means, while abandoning old ones. People within it can move to the “right” to embed new disciplines but only for them to serve as virtuous habits – platforms that allow them to move “left” toward greater freedom in the service of community.

There are some clear challenges to staying in the sweet zone and, although they don’t frame the problem this way, O’Toole and Vogel enumerate a few of them. Firms with the features of conscious capitalism have trouble maintaining their philosophy when the original founders leave the organization, as well as when the companies either go public or are sold at a premium to a large public company. These challenges in turn suggest counter-measures, such as selling the firm only to employees and remaining private. Many conscious capitalist companies such as Patagonia and Whole Foods sell premium products to higher income people who are prepared to make the trade-offs implied. Growth outside of these ecological niches may threaten their ability to live their values and they may have to actively avoid businesses and technologies that will disrupt them too severely. W.L. Gore and Associates, the makers of Gore-Tex, exemplify many of these features. They remain a private company and are said to relinquish direct control of products that threaten to become commodities, preferring to license and sub-contract their manufacture and distribution, rather than bring them in house.

In short, the ecological perspective suggests that conscious capitalism is a not a new paradigm but a new name for a developmental phase that many organizations go through. There is no doubt it is a desirable phase but staying in it for as long as possible is not just a matter of will or embracing a new paradigm. There is no “secret”, no elixir of corporate youth; what is required is a deep understanding of the systemic processes that are at work in the complex ecologies of organizations.