"A Great New Book" —Larry Kudlow, CNBCGet it on AmazonExplore the Book
You’re going to hit me with the small sample size argument here, but that’s okay.
I firmly believe that the purpose of a company is to make life better, and if it does that well, it will make a profit. If, on the other hand, a company makes life worse, the market should let that company die.
Some companies try to improve life with insanely great technology products. Some make life better with fast, safe cars that are fun to drive. Some make life better with clothes people want to wear. Some make better components for those other great products.
But no business exist just to make money, because no reasonable person would buy from such a firm. Or work for it. Or supply it.
Imagine you have a choice in buying a computer. One computer was designed by a man whose stated ambition is building “insanely great” products “that people love.” The other computer comes from a company whose stated goal is to “make as much money for ourselves as we possibly can.”
The only rationale for buying the computer designed to make its seller richer–even at the expense of the customer, its employees, and its vendors–is because you can’t afford the “insanely great” computer. So you settle for something cheaper.
No one in his right mind would help a company get rich if the company’s only mission is to get rich. Why would they? That’s stupid. On the other hand, neither will most people buy an inferior product simply because the company that made it donates money to the customer’s favorite charity. The customer could just as easily buy the superior product and donate to the charity on his own.
People gladly do business with companies whose purpose involves great missions–like building insanely great products that people love. And companies that consciously put customers first, employees next, the community after that, suppliers, partners, and, finally, investors outperform companies that exist only to make a buck.In fact, according to Harvard Business Review, conscious companies outperform the S&P 500 by a factor of 10.
You’re probably skeptical. In fact, if you read my blog, chances are you agree with T.J. Rodgers, founder and CEO of Cypress Semiconductor.
Back in 2005, Rodgers and Milton Friedman engaged in an online debate with Whole Foods Market CEO John Mackey. Mackey and I agree on the purpose of companies, but Rodgers says we’re Marxists. (Rodgers isn’t alone. A gentleman called me as much in a comment to yesterday’s blog.) Here’s how Rodgers summarized Mackey’s business philosophy:
It seems Mackey’s philosophy is more accurately described by Karl Marx: “From each according to his ability” (the shareholders surrender money and assets); “to each according to his needs” (the charities, social interest groups, and environmentalists get what they want). That’s not free market capitalism.
Rodgers goes on to talk about his pride in putting profits ahead of his customers, his employees, his suppliers, and his community. While he encourages his employees to donate to charity, he lets everyone know that they better keep their eyes peeled when doing business with Cypress Semiconductor. He will do anything the law allows to maximize his profits.
Mackey, on the other hand, won’t. In fact, Mackey subordinates profits to five other stakeholder: customers, employees, community, suppliers, and the environment. Mackey believes that building a company with a higher purpose results in better value for everyone involved. Profits are, to Mackey, a necessary byproduct of doing great work.
Of course, Mr. Rodgers, who’s been labeled the toughest boss in Silicon Valley, has earned a lot more money for his investors, right?
In fact, when it comes to running a successful business, it’s doubtful Mr. Rodgers could even get a job mkanaging a Whole Foods Market.
At the time of their debate in 2005, Mr. Rodgers’ company had negative retained earnings of over $400 million. That means Rogers had lost $400 million of investors money through his “profits for profits’ sake” business philosophy. At the same time, Mr. Mackey’s Whole Foods Market had the highest profits of any food retailer, including Walmart.
Since the debate, things have only gotten better for Whole Foods Market and worse for Rodgers’ Cypress Semiconductor. In their latest reports, Whole Foods returned a profit to its investors of $1.47 per share, while Cypress presented its investors with yet another loss of -$0.31 per share.
Rodgers started Cypress in 1960, and he’s grown the company to a market cap of $1.6 billion. Impressive.
But not as impressive Mackey’s Whole Foods Market. Whole Foods went public in 1985. Its market cap today is just under $19 billion. And, unlike Cypress Semiconductor, Whole Foods regularly increases the value of its shareholders’ investments.
I agree wholeheartedly with Mr. Mackey’s assessment of T.J. Rodgers and his company’s performance:
Cypress Semiconductor has struggled to be profitable for many years now, and their balance sheet shows negative retained earnings of over $408 million. This means that in its entire 23-year history, Cypress has lost far more money for its investors than it has made. Instead of calling my business philosophy Marxist, perhaps it is time for Rodgers to rethink his own.
When you read the entire debate of Friedman and Rodgers vs. Mackey, and I strongly encourage to do so, you’ll realize that Rodgers is not a gentleman or scholar. As Mackey noted in his rebuttal, Rodgers clearly failed to actually read Mackey’s original arguments. Instead, Rodgers jumped to angry and wrong conclusions. For instance, Rodgers assumed that all of Mackey’s employees were unionized, but none of Mackey’s employees belong to unions. Rodgers assumed that Whole Foods Market loses money, when Whole Foods’ balance sheet blows Cypress’s out of the water.
Perhaps Conscious Capitalism is new age bunk, as my commenter believes. It makes more money than a narrow profit motive.
At the beginning of this post, I asked question about why businesses exist. Now, think about why movements like the Tea Party exist.
Does the Tea Party exist, as that commenter wrote yesterday, to express “anger and rage?” Is that our version of the profit motive? Getting things off our chests? If so, we don’t need a tea party; we need psychiatrists. Or confessionals. No one who’s not already involved in the Tea Party movement would join to help us vent. Sure, we can get up from our couches, throw open our windows, and yell “I’m mad as hell, and I’m not going to take it anymore!” We’ve done that. It didn’t work. But maybe it made some people feel better. “I’ve done something.” Right. Liberals wear goofy ribbons to express their concern, and conservatives yell to express theirs.
And Jamie Dimon gets a raise.
And the government rakes in more power.
And the debt grows.
And the community banks sell or fold.
And the labor force shrinks.
And we’re still yelling.
If our purpose is to live up to our notion of American exceptionalism, on the other hand, then yelling won’t get us there anymore than a narrow focus on profits made Cypress Semiconductor a good investment. If our purpose is to arrest America’s decline–and it’s in steep decline–then we need to live that purpose.
It begins with developing a stakeholder map. Yes, the people who show up at our After Parties and rallies, and the people who read the daily newsletter, are stakeholders. Very important ones. The people who donate $2 or $5 every month, they’re invaluable stakeholders. But they’re not the only ones.
If we’re truly the examples of American exceptionalism, we better get a clear picture of all of America’s stakeholders. Let’s begin with the generation that’s now inheriting this great country. You’ll know them by their tats and piercings. They’re under 31. And there’s a lot of them.
Another stakeholder is the GOP establishment–that cursed body of bumbling nabobs that gave us TARP. Yes, they are stakeholders, too. So are many Democrats.
Many of the people who jumped into the OWS movement are stakeholders, too. Not the nut jobs highlighted on the evening news for defecating on police cars and raping women. Not the true Marxists, either. But those criminals and crazies weren’t the only people in those OWS camps. I’ve met a few of the first joiners. While, on the surface, their “demands” were mostly out of sync with the Tea Party, when I applied the 5 Whys, I found that the basic problems that motivated OWSers were the same problems that motivated the first Tea Parties. Namely, bailouts.
Thomas Jefferson once wrote:
I know of no safe depository of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them but to inform their discretion.
I believe that most of those who oppose us–those who would trade their own freedom and yours for a bit of promised security from the government–are ill-informed. I believe that most Americans are good people who simply want to live out their lives as best they can. If I didn’t believe that, I’d leave this country and renounce my citizenship. And I might still be convinced that escape is my best option.
If our purpose is to reform America, to incubate American exceptionalism from a theory to truth, then we cannot simply stand in parks and yell. Nor can we cloister ourselves in secular monasteries, re-reading the Constitution and obscure theories of government.
If we are to restore (or establish) American exceptionalism, we need to inform their discretion. That’s not easy work. It’s not nearly as fun or sexy or thrilling as screaming at hippies in a park. But it might actually work.
If you want to get started on this noble path of informing their discretions, look into the Center for Self-Governance. Turn passions into purpose.
And let yourself smile. It’s going to be okay.