Can compassionate capitalists really win?

March 30, 2011: 11:57 AM ET

Raj Sisodia, head of the Conscious Capitalism Institute, believes companies that focus on the bottom line, instead of on employees' needs, will fall behind.

By David Whitford, editor-at-large

Raj Sisodia

Raj Sisodia, making capitalists conscious

After years of layoffs, cutbacks, and closures in the corporate sector, it's hard to imagine that any competitive American company really puts the needs of its employees before its profits. But Raj Sisodia is a big believer in corporate compassion. Born in India, Sisodia was educated there and at Columbia University in New York, where he received his PhD, and he's currently professor of marketing at Bentley University in Waltham, Mass.

In May, Bentley will host the third annual international conference sponsored by the Conscious Capitalism Institute, of which Sisodia is chairman and co-founder. Its supporters include Whole Foods (WFMI), Costco (COST) and the Indian multinational, Tata Group. Fortune caught up with Sisodia to discuss the changing dynamics of American capitalism after the deepest recession in decades.

What is Conscious Capitalism?

Conscious Capitalism is defined by four characteristics. First is a higher purpose. There needs to be some other reason why you exist, not just to make money. Second is aligning all the stakeholders around that sense of higher purpose and recognizing that their interests are all connected to each other, and therefore there's no exploitation of one for the benefit of another. The third element is conscious leadership, which is driven by purpose and by service to people, and not by power or by personal enrichment. And the fourth is a conscious culture, which really embodies all of these elements: trust, caring, compassion, and authenticity.

That sounds conscious but it doesn't sound like capitalism. How well do those attitudes and policies hold up during hard times?

It was interesting to observe how some of the companies that we've become very closely aligned with dealt with the global economic downturn in 2008. The Container Store and REI, for instance. Those two CEOs said first of all, "We are not going to lay off anybody. That's number one. Second, we are going to protect the weakest within the system, which are the part-time workers. They will not be asked to take any kind of pay cut, any kind of benefit deduction, or even reduction in their hours, because they are the most vulnerable in the system. And then all the salaried people will take an across-the-board pay freeze, or even a pay reduction." The sacrifice was shared equally between the people who could most afford to do it, and the weakest were protected.

Did the companies suffer as a result?

We tracked them. They were down much less than others. Because conscious companies operate in a system of loyalty, trust and caring, they tend to rally around each other when times are tough. They have a greater sense of oneness with their suppliers, with their employees, with their customers.

I had a CEO in my class the other day that said, "Our business went through a 30% decline. If I had laid off 20% of my work force, it probably would have resulted in seven or eight foreclosures, and maybe six or seven divorces. I decided that as a company, we are better able to manage through this crisis than many of these families are, so we'll just get through it together."

So they were building a factory. They decided to look at their own employees. A number of them had been masonry workers and carpenters and plumbers and electricians in a previous life. They actually put their own employees to work building the new factory. So now they have this building, pretty much built by their own employees. Of course the business has come back, and now they're growing 40% quarter over quarter. The level of engagement and oneness and commitment and gratitude that these employees feel towards these kinds of businesses is tremendous. It's just immense.

In your book, Firms of Endearment, which came out in 2007, you talk about how social and demographic trends are influencing capitalism.

There is a fundamental shift going on in the culture. It's not a drastic choice anymore between Communism and capitalism; everybody believes in free markets and free people. The question is how do we refine it? How do we create the best possible kind of free markets and free people? Beyond that, the median age crossed 40 for the first time in 1989. If you look at what happens to people as they age, mid-life and beyond, it's not so much about, "How much can I accumulate?" and "What's in it for me?" They start asking questions about meaning and purpose and legacy. And then if you look at the impact of the Web, it has created almost total transparency and almost total connectivity.

So people know about more things. They're more concerned about the well-being of others. They can organize. And the last thing -- this has been a longer-term trend -- is the so-called Flynn Effect: The human IQ has been rising at the rate of 4% a year for decades now. We're more intelligent than we were 50, 60 years ago.

I am, or just the new people coming along?

All of us. [Laughter] Maybe it's skewed towards the younger generation, I'm not sure. But I think the fact is that through better nutrition, education, or just human evolution, we are becoming more intelligent. And there's a long-term journey of rising consciousness that we are all part of. If you go back 150 years, slavery was acceptable to most people. A hundred years ago women did not have the right to vote. Fifty years ago we lived in a segregated society and colonialism was common. Until three months ago we had "Don't ask, don't tell."

To me, these are all examples that suggest we are in fact moving in the direction of truly recognizing what is right, what is wrong, what is acceptable, and what is not. Companies that are not changing their approach -- that are still focusing on their own bottom line and not worrying more broadly about consequences -- are finding that people don't want to work there, they don't want to shop there, and they don't want them in their communities. People are migrating, when they have a choice, to businesses that do offer meaning and purpose and a positive impact all around.

So you believe that capitalism is a force for good?

I do strongly believe in the power of capitalism.

Karl Marx believed in the power of capitalism, too. But he saw it as ultimately promoting inequality. You disagree?

Yes, because if you have a conscious approach to business, it doesn't lead to inequality. There's a built-in mechanism to make sure that everybody prospers at the same time. And that's ultimately the power behind this: Recognizing the interconnectedness and interdependence. Any exploitation of one element for the benefit of others in the long run is not going to work. It's basic system theory. The system is only as good as its overall ability to function, and to be healthy all the components have to be healthy.

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