Monday, July 23 , 2018, 10:45 am | Fair 75º


Karen Telleen-Lawton: Conscientious Capitalism: Be Sincere

A generation after the first mentions of conscious capitalism, the practice inspires praise as well as jeers.

It is described by Conscious as “a way of thinking about capitalism and business that better reflects ...  the human journey, the state of our world today, and the innate potential of business to make a positive impact on the world.”

A squishy definition, to be sure, but the practice has grown increasingly popular. More than 800 U.S. investment funds incorporate ESG values (environmental, social consciousness, and governance), up from 100 in 2005.

That represents a total of more than $4 trillion in assets in 2014.

Recently, some companies have been burned implementing the concept that their business’ stakeholders include not just owners but employees, consumers and the community.

According to a June New Yorker article, Juno’s conscious capitalist founders kept a smaller percentage of their drivers’ fares and instituted a form of employee stock ownership.

But an Israeli company purchased them in April, changing generous rules and dropping the ownership plan. They offered a pittance for the employee shares.

Wall Street generally rejects the idea that businesses have multiple stakeholders, pointing to the primacy of investor rights.

A 2004 Economist article argued that from an ethical point of view, conscientious capitalism is philanthropy at other people’s expense. Managers “are entrusted with the care of assets belonging to the firm’s stakeholders.”

Investors following this credo have criticized other companies like Costco and Whole Foods for paying workers more than the minimum wage. American Airlines’ raises to pilots angered investment bankers.

“Labor is being paid first again,” complained a Citigroup analyst. “Shareholders get leftovers.”

Punit Arora, at the Colin Powell School of Civic and Global Leadership, CUNY, believes entrepreneurs can consider taking on a social cause as part of their business strategy. But they should carefully consider three factors.

How naturally does a cause line up with your company's goals?

Research from the Ivey School of Business in Canada shows involvement in social causes benefits the company only when it leads to improved stakeholder relationships.

REI’s regular participation in local plant restoration and other environmental causes is a natural fit.

Are you willing to put in the time and commitment?

Arora points to a recent study published in Strategic Management Journal showing that firms develop credibility with their stakeholders when they get involved in more socially responsible practices.

Companies need to take a long-term view because the payback emerges slowly as the consumers understand it is not “greenwashing.”

This squares with the Ivey School research which found that unless they had a long-term orientation, most new ventures in their study performed poorer when they were involved in social causes.

Can you convince employees first?

Other research showed companies are more likely to gain from investing in social causes when employees are first brought into the fold. Employees are the voice of the company and the place where company initiatives will succeed or fail.

For conscious capitalism to work, it seems clear the social consciousness needs to be integral to a firm’s overall strategy.

How these factors played out at Juno, American Airlines, Costco or Whole Foods, I don’t know.

If the chosen cause is window-dressing, then it may not be a net benefit. But if the social consciousness is integral to business strategy, then an unfriendly takeover like Juno’s may also raid the company of its winning success.

— Karen Telleen-Lawton serves seniors and pre-seniors as the principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara. You can reach her with your financial planning questions at [email protected]. Click here to read previous columns. The opinions expressed are her own.

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