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Does 'Capitalism With a Conscience' work?

11/30/2012 04:43 pm ET | Updated Jan 30, 2013

As we near the end of 2012, which corporate enterprises are the most profitable -- those that relentlessly chase ever higher quarterly stock growth and reward their top executives lavishly for doing so? Apparently not. It turns out that bottom-line driven entities lag way behind many well-known and highly respected companies that operate on an entirely different model. We are not talking about community cooperatives, farmers' markets, or mom-and-pop small businesses. We are talking about Whole Foods Markets, Wegmans, New Balance and the ubiquitous -- and everyone's favorite neighborhood gathering spot -- Starbucks.

None of these enterprises invests in huge advertising campaigns -- you won't see multi-million dollar spots on primetime TV or elsewhere for that matter. However, they have generated exceptionally high customer loyalty, as well as remarkable stockholder return on investment that substantially exceeds that produced by those corporate entities that are focused exclusively on short-term growth and profit.

So, what is going on here? Well, it turns out that they are engaged in a type of capitalism that is not obsessed with ever increasing stock prices above and beyond everything else. Of course, they want to be profitable and reward their stockholders accordingly. But that is not the be-all and end-all of their existence. Stockholders are only one set of stakeholders, as these companies see it.

Employees, at all levels, are also important stakeholders, as are the specific communities in which they operate. This is not simply a calculated strategy to make employees and other stakeholders feel good about the company, but a deliberate decision to act contrary to the prevailing practices of modern corporate capitalism. For example, they pay their workers more than their competitors and empower them by inviting their contribution to company decision-making. The insights gathered at the checkout counter, stockroom, and everywhere else are actively solicited. And, they devote as much attention to the needs of the communities in which they are located as they do to the interests of their stockholders.

Are Starbucks and the rest some kind of cooperative, employee-owned enterprise, as many of the Silicon Valley start-ups were in their early days? Not really, although they share some important characteristics, such as a relatively flat organizational chart, peer-driven decision-making, and an equitable reward system. However, like their more traditional competitors, they are owned by their stockholders. And how have their stockholders faired relative to their competitors? Very well, it turns out. As the science writer and media theorist Steven Johnson reports in "Future Perfect: The Case for Progress in a Networked Age," these stakeholder-driven companies outperformed their competition to an astonishing degree over a recent 10-year period.

The public stakeholder firms... generated a 1,026 percent return for their investors, compared with the S&P 500's 122 percent return. By refusing to focus on maximizing shareholder value, they ... created eight times more value for their shareholders.

And how did they manage this? First of all, they rejected the extremely hierarchical organizational model that characterizes the typical large corporation today where CEOs and other senior officials behave like latter-day royalty whose word is law and who require obscene amounts of money and larger and larger private jets, yachts and the like to meet their insatiable need for affirmation. Incidentally, the stockholders of these companies are not the ones feeding this unending greed -- it is the result of a deliberately created system of interlocking company directorships whose members reward each other regardless of the merit of such actions. This behavior, accompanied by race-to-the-bottom wages for most everyone else, and
the ability of these corporate entities to rig the tax system to their advantage, has played a major role in the wealth and income gaps that have grown so dramatically -- and dangerously -- over the last couple of decades.

The alternative model--which Whole Foods CEO John Mackey calls "conscious capitalism"--rejects all the trappings of corporate excess, including extravagant compensation packages for top executives, private jets and the rest. Instead, it embraces a philosophy of fairness in compensation for all employees, including complete transparency about what everyone earns. As a consequence, no one at Whole Foods earns more than 19 times the amount paid to the average worker. This is in marked contrast with the 400-to-1 ratio that has developed in recent years for the U. S. as a whole.

It turns out that doing the right thing for your employees, your community, and other stakeholders not only demonstrates capitalism with a conscience; it is also good for business.

This article appears in Issue 26 of our weekly iPad magazine, Huffington, in the iTunes App store, available Friday, December 7.