Friday, 16 June 2017

Investopedia: Conscious Capitalism


Conscious Capitalism

DEFINITION of 'Conscious Capitalism'

A way of thinking about capitalism and business that better reflects the current state of the world and the potential of business to make a positive impact on it. The concept of Conscious Capitalism was popularized by John Mackey, Whole Foods cofounder and co-CEO; and Raj Sisodia, professor  of marketing at Bentley University, through their book Conscious Capitalism: Liberating the Heroic Spirit of Business. Mackey and Sisodia are  also the cofounders of the nonprofit organization Conscious Capitalism, Inc., which has local chapters in 18 U.S. cities nationwide, as well as eight other countries (as of  June 2016).  The principles of Conscious Capitalism have been adopted by a growing number of companies including Whole Foods Market, Starbucks, Container Store and Trader Joe's.

BREAKING DOWN 'Conscious Capitalism'

The Conscious Capitalism credo acknowledges that while free market capitalism is the most powerful system for social cooperation and human progress ever conceived, people can aspire to even more. It builds on the core foundations of capitalism such as voluntary exchange, entrepreneurship,  competition, freedom to trade and the rule of law, by adding elements like trust, compassion, collaboration and value creation. Conscious Capitalism does not abjure the pursuit of profit, but emphasizes doing so in a manner that integrates the interests of all major stakeholders in a company.

Towards this objective, Conscious Capitalism is based on the following four guiding principles -

Higher Purpose:  A conscious business (i.e. one  that adheres to the  principles of Conscious Capitalism) focuses on a purpose beyond pure profits, and in doing so, inspires and engages its stakeholders.

Stakeholder Orientation: While businesses have multiple stakeholders including their customers, employees, suppliers, investors etc. , some businesses focus on return to their shareholders to the virtual exclusion of everything else. A conscious business will focus on the whole business ecosystem in order to create and optimize value for all of its stakeholders.

Conscious Leadership: Conscious leaders emphasize "we" rather than "me" to drive the business, and strive to cultivate a culture of Conscious Capitalism in the enterprise.

Conscious Culture:  Corporate culture is the sum of the values and principles that constitute the social and moral fabric of a business; a conscious culture is one where the principles of Conscious Capitalism permeate the enterprise, fostering a spirit of trust and cooperation between all stakeholders.
Corporate Capital

The assets a business possesses that can serve as an income shock absorber to a specific class of stakeholders. Should the company experience financial difficulty, the capital in one class of stakeholder would be decreased in order to protect another stakeholder with a senior priority.
BREAKING DOWN 'Corporate Capital'

In the most ideal situation, where a business has very little risk of defaulting on a debt obligation, the amount of corporate capital would be close to the amount of the firm's shareholder's equity (total assets minus total liabilities). In the event of financial difficulties, any losses sustained would initially impact the firm's corporate capital (in the form of descending company's equity) before it would impact other senior stakeholders (such as bondholders).

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