Karma Capitalism
By Charmaine N. Clarke
The concept that good social practices make good business sense has been discussed and debated in business school classrooms - and real life boardrooms - for several years. One professor who is adding substantial weight to the argument that doing the right thing for all stakeholders does help ensure profitability is Bentley College Professor of Marketing Rajendra S. Sisodia, who shared his research in a compelling talk at CEIBS on May 12. Prof. Sisodia's research into what he calls "Firms of Endearment" (FoEs) shows that when companies build the concept of Corporate Social Responsibility directly into their operational practices and business strategies, they tend to enjoy substantial profits in the process. During a study covering ten years, he found that, 30 FoEs enjoyed average returns of 1,111 percent, compared to an average of 122 percent for S&P 500 companies.
These were among the startling findings of a study that led to the book Firms of Endearment: How World Class Companies Profit From Passion and Purpose, which Prof. Sisodia co-authored in 2007 with internationally recognized customer behavior expert David Wolfe, and Jag Sheth, Charles H. Kellstadt Professor of Marketing in the Goizueta Business School at Emory University. The book's central message showed that cutting costs and maximizing revenue may not maximize profit. "Profits, like happiness, elude pursuit," Prof. Sisodia told the CEIBS audience. "If you want to maximize profits, don't pursue profits. Profit is the result of the right actions."
FoEs typically spend more on employees' salary and benefits, comply with income tax requirements, and invest more in their communities, yet these higher costs did not result in lower revenue, said Prof. Sisodia. Instead, the goodwill the companies built up by being 'good' companies helped them become 'great' companies.
Karma Capitalism - Prof. Sisodia's term for this concept - is based on the principle that what goes around comes around. In short, companies that treat all their stakeholders as valued customers tend to develop a loyal client base and become well-respected, vital cogs in their communities. Their positive image influences their stock price and boosts sales, compensating for the above-average spending on salaries and community projects.
Prof. Sisodia and his colleagues found that FoEs have shied away from cut-throat capitalism but, instead, pursue profits through other 'C' words. For these firms, their operations exemplify "Conscious, Caring, Creative, Compassionate Capitalism in the 21st Century" - the title of Prof. Sisodia's CEIBS speech. "The world has crossed a tipping point," he said. "There is a waning focus on material [gains], a moving away from the 'me' focus to the 'others' focus."
The change has been triggered by: increased transparency resulting from the explosive growth of the internet; an aging society whose members are more concerned with spirituality and life purpose, and the backlash from years of corruption among companies. According to Prof. Sisodia, the business world is experiencing a paradigm shift, seen in the double-digit growth in philanthropy. The new buzz words encapsulating this shift, he said, are Authenticity, Caring and Transparency.
As a final point, the professor emphasized that this mutation is not about CSR. "With CSR, companies don't change their basic business model; they just add on a CSR component and may still be doing harm [to the wider society]," he said. "For FoEs, the entire society is a stakeholder; therefore CSR is moot because they have to be socially responsible. The reality is that, if companies want to be successful, they will have to learn how to care about all of society."
How to ID an FoE
Prof. Rajendra Sisodia offers the following clues to look for in identifying a true Firm of Endearment:
- Modest executive salaries
- An open-door policy at the executive level
- More time spent on training than competitors
- Employee turnover much lower than industry average
- Employees empowered to go the extra mile to satisfy customers
- Potential employees screened to find those who are passionate about the company and its products
- Efforts to humanise the company experience for customers and employees
- Lower marketing costs than industry peers
- Suppliers treated like partners
