20 Questions with Sunni’s Salon

By John Mackey, October 20, 2005  |  More Posts by John Mackey

This interview was originally published in Sunni's Salon, Sunni Maravillosa's monthly 'zine of individualistic, pro-freedom culture.

 

SUNNI: Hi, John, and thanks for letting me play my version of "20 Questions" with you today. How are you?

JOHN: Great!

SUNNI: Glad to hear it! I have a lot of things I'd like to touch on with you, and I don't want to take too much of your time, so let's jump right in. In doing some research, I found you being referred to as an "ex-leftist libertarian". I thought that a very odd phrase, since many individuals come to the freedom philosophy from a left perspective -- and lots of pro-freedom people are more concerned with personal and social issues than economic ones; that's generally considered to be a "leftist" slant. What do you think of that phrase? Does it fit you?

JOHN: I think that depends upon how "leftist" is defined. Usually people who define themselves as "leftists" are opposed to capitalism, economic freedom, and believe that the coercive power of government should be used to create more equality and social justice in society. Usually people on the left have sympathy for democratic socialism. When I was in my very early 20's I believed that democratic socialism was a more "just" economic system than democratic capitalism was. However, soon after I opened my first small natural food store back in 1978 with my girlfriend when I was 25, my political opinions began to shift. Operating a business was a real education for me. There were bills to pay and a payroll to be met and we had trouble doing either because we lost half of our initial $45,000 of capital in our first year. Our customers thought our prices were too high and our employees thought they were being underpaid, and we were losing money. Renee and I were only being paid about $200 a month and the business was a real struggle. Nobody was very happy and Renee and I were now seen as capitalistic exploiters by friends on the left who believed we were overcharging our customers and exploiting our workers -- all because we were apparently selfish and greedy.

I didn't think the charge of capitalist exploiters fit Renee and myself very well. In a nutshell the economic system of democratic socialism was no longer intellectually satisfying to me and I began to look around for more robust theories which would better explain business, economics, and society. Somehow or another I stumbled on to the works of Mises, Hayek, and Friedman, and had a complete revolution in my world view. The more I read, studied, and thought about economics and capitalism, the more I came to realize that capitalism had been misunderstood and unfairly attacked by the left. In fact, democratic capitalism remains by far the best way to organize society to create prosperity, growth, freedom, self-actualization, and even equality.

I no longer think of myself as a leftist, but I definitely don't think of myself as from the right either. For the past 25 years I've thought of myself as a libertarian, but I'm now beginning to move away from that label as well. I have a number of intellectual problems with libertarianism as a political philosophy as it currently exists. I believe we need a new social/political/economical/environmental movement in the world today and I've got some definite ideas what this movement should look like.

SUNNI: You sure seem to be popular in the libertarian community, despite having arrived here through a side door, so to speak. How do you account for that? [laughs]

JOHN: I'm not aware that I'm popular in the libertarian community. On the contrary, I've frequently found myself criticized for lacking sufficient doctrinal purity by many in this movement.

SUNNI: Perhaps it's the celebrity element at work, then, John ... In doing background research for this interview, I came across mentions of you at several libertarian sites -- Advocates for Self-Government and several blogs. I don't recall seeing any critical comments. But I'm sure that you'd get them after a speech -- the movement doesn't suffer a lack of critics. [laughs]

JOHN: It could be the celebrity element. I'm not shy about telling the media or anyone else that I'm a libertarian. I suppose I've brought some favorable publicity to the libertarian movement. I hope so anyway.

SUNNI: I'm sure you have. One of the Conspirators who blogs with me is a huge fan of Whole Foods Market -- she's a stakeholder in more than one meaning of the term -- and I know a number of loyal Whole Foods Market customers in the pro-freedom community. I know that some wouldn't bat an eye at its Declaration of Interdependence, for example, but others might be surprised to see how often the word "collective" and its variants show up on the Whole Foods Market web site ... or to see ideas like "shared fate" and "community citizenship" in its core values statement. How do you square all that with being libertarian?

JOHN: I personally don't see any contradictions here. Human beings are highly social animals and we evolved over hundreds of thousands of years living in small hunting and gathering tribes. I believe that much of our fulfillment as human beings comes from our participation in the various social organizations that we belong to. Today we are raised in families, live in neighborhoods and communities, and are members of a number of greater collectives. For example, I am a member of the following collectives: Austin, Texas, The United States, Homo sapiens, vertebrates, DNA-based life forms, planet Earth, Milky Way Galaxy, etc. I'm also a voluntary member of a number of organizations including my marriage with Deborah Morin, Whole Foods Market, various long-distance backpacking groups, various animal welfare/animal rights groups, and various libertarian organizations, plus many others. Even my physical body is a collective consisting of many billions of cells working together in various organs to stay alive and pass on its genetic material into the future.

I think the reason why many libertarians object to the words "collective", "shared fate", and "community citizenship" is that they associate those words with coercive, involuntary organizations such as the forced collectivization of Soviet agriculture under communism or other totalitarian political organizations. Needless to say I don't use these words in these contexts. I believe in voluntary cooperation as the key principle for organizing any collective organization. Whole Foods Market is a collective based on voluntary cooperation between all the various stakeholders. No one is forced to cooperate against their will and all are free to withdraw from the collective organization anytime they wish to. A collective without freedom is by nature coercive and is therefore unlikely to lead to human flourishing. However, collectives based on freedom and voluntary cooperation can lead to very high levels of human flourishing. Indeed, I seriously doubt that high levels of human flourishing are even possible without voluntary cooperation from millions of various communities and collectives.

SUNNI: It sounds to me like you aren't a libertarian of a Randian persuasion -- wholly profit-driven and focused on the self; is that accurate?

JOHN: That is correct. I was very inspired by Ayn Rand's novels like millions of other people have been. However, I don't agree with some of her philosophies. For example: I don't think selfishness is a virtue and I don't believe that business primarily exists to make a profit. Profit is of course essential to any business to fulfill its mission and to be successful and to flourish and I will defend the goodness and appropriateness of profits for business with great passion. However, profit is not the primary purpose of business. Renee and I didn't begin Whole Foods Market to maximize profits for our shareholders. We began it for three main reasons: we thought it would be fun to create a business; we needed to earn a living; and we wanted to contribute to the well-being of other people.

As the business grew we created our mission statement back in 1985 and have tried to fulfill it ever since. That mission very clearly articulates that we have collective -- there's that word again -- responsibilities to all the various constituencies who are voluntarily cooperating with the company. In order of priority these constituencies or stakeholders are: customers; team members; investors; vendors; community; and environment.

We measure our success on how well we meet the needs and desires of all of these various stakeholders. All must flourish or we aren't succeeding as a business. I'll email you a graphic that represents how Whole Foods views the voluntary cooperation between the various stakeholders:

Whole Foods Market Business Paradigm

We call this a "New Business Paradigm" because it puts the Business Mission and Core Values at the center of the business model -- not maximizing profits. Profits aren't the primary goal of the business. They are an important result of fulfilling the Business Mission and meeting the needs and desires of customers. I'm writing a book on Whole Foods philosophy of business right now so it's hard for me to do justice to all the ideas and answer all the standard objections in this interview. My more complete statement on this will need to wait for the publication of the book. I'll share two ideas as food for thought here though.

Free-market economists have done a major disservice to capitalism and to business by making profit maximization the supposed primary goal of business. The terrible reputation of business in the world today is a direct result of the belief that business has no other purpose besides maximizing profits. The average person believes that business should care about its customers, employees, society, suppliers, the environment -- as well as its investors. The fact that business philosophers and economists articulate a philosophy that business should only care about maximizing profits and shareholder value (and has no other compelling ethical responsibilities to any of the other stakeholders) has done incalculable harm to the reputation of business. The "brand of business" in the widest sense is pretty terrible throughout the world. Read David Korten's book When Corporations Rule the World to get a good perspective on how many intellectuals see corporations and big business today -- a threat to the well-being of the entire world. The anti-globalization movement is actually an anti-corporation movement and it is a direct result, in my opinion, of the faulty logic of the shareholder value maximization model. You and I know that business and capitalism are helping increase prosperity throughout the world. Too bad the economists have done such a poor job of intellectually justifying the intrinsic ethical nature of business and the capitalist system. Both business and capitalism have terrible reputations as a result. Socialism, communism, and anti-globalization are all reactions to this philosophy. I sometimes wonder whether any of these horrible philosophies would have had much of a following except for the intellectual failures of our economists to properly understand the real purpose of business.

Second, there is a fundamental paradox that I call the "paradox of shareholder value". The best way to maximize shareholder value is to not make maximizing shareholder value the primary purpose of the business. Why not? Because it is the business that satisfies customers best that has the most customers, the highest sales, and the most profits. The best way to satisfy customers best is to organize the entire business around satisfying the customer. Every communication the business makes towards its customers, its employees, and the media should be about putting the customer first. Ultimately the best way to satisfy customers' needs best is to actually put those needs first. If profit is the articulated primary goal of the business then it is unlikely that the employees or management of the business will dedicate themselves to customer satisfaction to the same degree they would if customer happiness was seen as more important than investor profits. In the first case customer happiness is merely a means to an end -- maximizing profits. In the customer-centered business, however, customer happiness is an end in itself and because it is it will be pursued with greater interest, passion, attention and empathy than the profit centered business is capable of.

Let me give you an analogy that may make this point better: What is the key to happy marriage? Is my wife's happiness an end in itself for me or is her happiness merely a means to a different end -- my own personal happiness? It has been my experience that I am happiest in my marriage when my love for my wife causes me to place her needs and desires first -- ahead of my own. When my wife is happy then I am happy. When she isn't happy, then I'm not happy. I achieve my personal happiness in marriage best by not focusing directly on it, but by focusing on her happiness as the primary goal for me in the marriage. That is the way love works, in my opinion. The beloved's happiness is an end in itself -- not a means to some other end. Paradoxically by seeking to maximize my wife's happiness, I also maximize my own. However, that is a secondary by-product of my desire for her personal happiness. Fortunately for me my wife shares my philosophy of marriage and reciprocates my dedication to her happiness with an equal dedication to my own happiness as well.

Similarly to a happy marriage, the most successful businesses put the customer first -- ahead of the shareholders. They really have to have this dedication to the customer to maximize customer happiness. Customers aren't stupid. They know when they are being misled or merely being used. It is also difficult to impossible to truly inspire the creators of customer happiness, the employees, with the ethic of profit maximization. Maximizing profits may excite shareholders, but I assure you most employees don't get very excited about it even if they accept the validity of the goal. It is my business experience that employees can get very excited and inspired by a business that has an important business purpose (such as selling the highest quality natural and organic foods) and teaches them to put the needs of the customers first. People enjoy serving others and helping them to be happy -- when they know this is their primary goal and are also rewarded for successfully doing so.

The customer-centered business is usually the most successful and the most profitable, while the shareholder centered business usually underperforms over the long-term. I suggest reading Jim Collins' two books Built to Last and Good to Great for empirical evidence to this viewpoint. The ultimate test of these two business theories, however, is in the marketplace -- not in theoretical arguments. My company, Whole Foods Market, is a mission-driven business that puts the customer first, the team members second, and the shareholders third. We are winning competitive battle after competitive battle in the marketplace against businesses which adhere to the philosophy of maximizing profits and shareholder value as their primary goal. Whole Foods has never had a store we open ever fail in the marketplace. We have never lost a competitive battle in 27 years of business! Why not? Because the profit-centered businesses we compete against cannot beat us in the marketplace. Our customer and team member-centered business model beats them every single time.

You may or may not agree with my business philosophy, but it doesn't really matter. The ideas that I'm articulating result in a more robust business model than the shareholder-maximization model that it competes against. They will triumph over time, not by persuading intellectuals and economists through argument, but by winning the competitive test of the marketplace. Someday businesses such as Whole Foods which adhere to a stakeholder model of customer and employee happiness first will dominate the entire economic landscape simply because it is a more robust business model. The old shareholder model that most economists believe in will not successfully compete over the long-term with the new paradigm that Whole Foods represents and that I've tried to articulate here. The better business model will win in the marketplace and it's the Whole Foods model. Wait and see!

SUNNI: [laughing] Geez, John, you're getting ahead of me -- answering questions I haven't asked yet! So, what does it suggest to you about this country that two very different types of retailer -- Whole Foods Market and Wal-Mart -- are both so profitable?

JOHN: It means that the mass market is segmenting in food -- just like it is doing in every other category as well. Some people want the cheapest food and some people want the highest quality food with high levels of customer service. Wal-Mart meets the first group of people and Whole Foods meets the needs of the second group.

SUNNI: You've mentioned your management style, and I would like to explore that more. It's certainly worked very well, but it doesn't seem to be a very libertarian one. Do you see your management style as paradoxical given your libertarian philosophy?

JOHN: Most corporations in the United States are hardly the epitome of libertarian utopias. In fact, most corporations in the United States are organized as top-down, command & control, hierarchical systems. Very little personal freedom exists in these corporations. Their employees are often managed through either pure financial incentives -- greed -- or through fear -- "my way or the highway". Whole Foods is very, very different. Our mission at Whole Foods can be summed up by our slogan "Whole Foods, Whole People, Whole Planet". We put great emphasis at Whole Foods on the "Whole People" part of this mission. We believe in helping support our team members to grow as individuals -- to become "Whole People". We consciously use Maslow's hierarchy of needs model to help our team members to move up Maslow's hierarchy. As much as we are able, we attempt to manage through love instead of fear or greed. We allow tremendous individual initiative at Whole Foods and that's why our company is so innovative and creative. Most retail companies create a prototype retail store format and then cookie-cutter reproduce it across the country. Think McDonalds. Not Whole Foods. We have no prototype store. All our stores are unique. Why? Because our team members are constantly innovating, experimenting, and improving them. Whole Foods is very much committed to a Hayekian discovery process and our team members -- both as individuals and as members of teams -- are leading this Hayekian discovery process. As our team members learn and grow as individuals, as they become self-actualized, as they become "Whole People", our company better fulfills its mission to all of its stakeholders.

The seeming paradox that you keep hinting at is no paradox at all. Human beings are both individuals and members of communities (or collectives). We learn and grow best through relationships and our growth will always be limited without them. I haven't met anyone that I consider to be self-actualizing who did it all by themselves. Freedom as an ideal is a very, very incomplete ideal when it lacks love. Freedom is my highest "political ideal", but love is my highest "personal ideal". We need both. There is no paradox and there is no contradiction here. Freedom and love: let us marry these two together!

SUNNI: [laughing] Now that sounds like a marriage made in heaven, John! And thanks for not taking my pushing here too personally; I actually don't see it as a paradox either, but I imagine that you know of people in the pro-freedom community -- I sure do -- who seem to have an almost phobic reaction to anything that moves beyond the individual level. I'm an individualist, but I'm no idiot -- we're social animals, and one of the things that interests me most about libertarians -- especially as a psychologist -- is how they approach those two aspects of human nature.

JOHN: Some libertarians may be using their political ideology as a psychological defense to avoid the challenge of further personal growth. From a psychological standpoint the challenge for all of us is to simultaneously continue to individuate as individuals while also integrating closer to our communities. In my experience, libertarians are more enthusiastic about the individuation part than the integration part. However, psychologically healthy, self-actualizing people need to be doing both.

SUNNI: A very interesting observation, John ... and of course, if the individuals aren't psychologically healthy, it's very difficult to create a vibrant, pro-freedom community. This reminds me: I've seen people call you an anarchist, but in other places I've read others who claim you think some government is necessary, which would make you at the very least a minarchist. Which is it?

JOHN: I'm not an anarchist. Of course government is necessary. Without a monopoly of force by some institution -- let's call it "government" -- we will have various violent gangs and private armies struggling for political control and the winner will become the de facto government. While government is necessary the never-ending political challenge is to find ways to keep government in check. "Who guards the guardians?" remains a huge philosophical issue. The United States has done better than most other countries in this regard with the creation of the Constitution and Bill of Rights, and the various governmental checks and balances. Unfortunately, as we both know, government has been steadily gaining in power ever since the United States came into being. What is the solution? There is no simple solution--just the ongoing and continual quest by people who care about freedom and individual rights to work to expand them and lessen governmental power. Progress can be made. For example, there is much more freedom in Eastern Europe than there was 30 years ago.

SUNNI: Yes, there's been a lot of progress, but I think many would say that's in spite of the kind of government you're speaking of. I don't want to focus on this too much, but I'm curious about how you might think a monopoly of force by any institution can be genuinely limited, short term as well as long term. It seems to me to be the nature of powerful institutions to always work to retain, and gain, more power.

JOHN: Competition is the best way to limit any power -- economic, social, political, or military. For example, it is good that our states have to compete for businesses and citizens. To some extent this puts a limit on their ability to tax their citizens because many will vote with their feet and move to a different state. California has been driving business to move to other States for a couple of decades now. Our federal government could obviously use more competition as well. As financial capital becomes more and more liquid and mobile it will be increasingly easy to move it to more favorable tax homes and more free locales. That may be illegal, but it will increasingly happen anyway if our federal government becomes too oppressive. Breaking the federal government's monopoly on money is obviously very important. I think we are pretty near to doing that right now with increasing competition to the dollar from the euro and eventually the yuan. People and businesses will be able to denominate their investments and assets in whatever currency they have the most faith in.

So competition with other nations will become increasingly important as a check on our federal government's power. Obviously Constitutional amendments could be very powerful checks as well, but are difficult to get into law. Probably the most important thing we can do, however, is continue to fight the good fight for more liberty. Citizen activism can make a huge difference in the world and frequently has.

Liberty has always fought an uphill battle throughout history. You can pretty much name any period of time in history that you wish to, and if you study it carefully, you'll see that liberty was always very constrained. There never was a golden age for liberty. I would argue, in fact, that right now there probably exists more absolute personal and political freedom across the entire globe than at any time in history. Even here in the United States. We tend to forget how little freedom that women and minority citizens have had in America throughout our history. There has been tremendous progress made in these 2 areas within my own lifetime. We tend to forget the progress we have collectively made and instead focus more on what has been lost or not yet gained. Progress tends to advance in more of a spiral fashion than a straight line upward.

SUNNI: Hmm. I'll have to think about that, John; I'm not convinced that competition is a sufficient check for an institution with a monopoly on force. It seems to me that decentralizing force is the best course. But, back to Whole Foods Market. I read that you were pretty upset after the Madison Wisconsin Whole Foods Market voted for a union -- not surprisingly, since most unions aren't private or voluntary organizations these days. Yet I know some libertarians who are pro-union. Can you give me the short version of why you think unions aren't beneficial?

JOHN: I've written a 17-page pamphlet (a chapter in my upcoming book) called Beyond Unions. In it I outline my philosophy towards unions. I can't do complete justice to all my ideas briefly. Let me just make a few points.

The right to collective bargaining (unionization) is an important legal right. It is important that employees, when they wish to, should have the legal right to form unions. In countries where unions are outlawed we see massive totalitarian exploitation of workers. Solidarity in Poland was a very important force to liberating that country from communism.

No employee should be forced to join a union against their will. Unfortunately in many states in our country, such as California, once a union is voted in by a majority of the employees, employees no longer have free choice in this matter. This closed shop means they must join the union and pay dues to the union whether they wish to or not. If they don't join then they are fired. I believe open shops should be legal in all states and no employee should be forced against their will, as a condition of employment, to join a union.

SUNNI: Yeah, that's what I find most objectionable about union practices.

JOHN: It's illegal in the United States for there to be company unions -- special unions which are formed and controlled by the employees and managers of the company to represent their interests and collectively bargain on their behalf. These type of unions are legal in many countries such as Japan, but are illegal in the United States. Instead the law requires that all unions be outside unions. I believe this law should be repealed and that company unions should be as legal as any other kind of voluntary association. Why shouldn't employees and employers have the legal right to form this type of voluntary association if they wish to? Preventing company unions is a form of monopoly protection from competition for outside union organizations.

Unions as they evolved in the United States became very adversarial, untrusting, and opposed to the success and prosperity of the business. This is my major objection to unions today -- they harm the flourishing of the business for all the stakeholders. Instead of cooperation between stakeholders, they focus on competition between management and labor. Instead of embracing the notion of the "expanding pie" vision of capitalism -- more for everyone, or win-win -- they frequently embrace the zero-sum philosophy of win-lose.

The Whole Foods store in Madison, Wisconsin was organized in the summer of 2002 by a group of young union organizers who hired into the store to organize it. Most of them quit right after the election. The union election was a wakeup call for Whole Foods leadership to refocus on the team member stakeholder. We had gotten out of balance and the pro-union vote was a symptom of it. We made major changes in 2003 to improve our benefits to our team members throughout the company. I'm happy to say that the team members in Madison collectively petitioned to remove the union from their store just over one year later and Whole Foods is once again 100% union free despite a few other union organization attempts over the past three years.

Our experience with unions in Madison and in other cities has helped make our company a better company. I think this illustrates one really valuable function that unions play in our society. They are a form of competition for the hearts and minds of your employees (team members). If you make the mistake of taking your team members for granted, treat them poorly, or have inferior pay and benefits then you are vulnerable to the competition from unions. The threat of unions can help a company improve, just like any other competitor does.

SUNNI: I don't know if you know that I'm part of the consumer privacy group CASPIAN. In addition to exposing the reality behind supermarket "loyalty" cards, we also challenge the increasing surveillance of consumers, through technology like RFID chips and the increasing databasification of every transaction. Whole Foods Market used to have a card, but it was discontinued -- what brought about its end? Are there any plans for a new one?

JOHN: We tried a card, but it was expensive to administer and wasn't popular with our customers. There is no plan to bring one back anytime soon.

SUNNI: What's your view on consumer privacy? Is it okay for companies to mine and crosslink data from people, then sell it to others? Is it okay for that information to be turned over to government agencies or contractors? Where do you see a line between providing good customer service and invading customers' privacy?

JOHN: I believe in consumer privacy. It is about basic trust between the retailer and the customer. We want what is best for our customers. Respecting their privacy comes with the territory, in my opinion.

SUNNI: Whole Foods Market is known for its excellent customer service. Many retailers see datamining and customer relationship management -- which involve differing types of customer monitoring -- as ways to provide better customer service. How does your company provide such good service without the snooping cards?

JOHN: We believe in treating all our customers with respect. Our team members are taught to give good service to everyone and not single out differing groups for special services. All our customers are equal and all should be respected. No discrimination.

SUNNI: You know, John, respect's a word that I don't see much in the supermarket industry news and literature I follow. And when I go shopping, I often don't feel like my business is respected -- it's more like I'm being tolerated, if that. It seems to me that many retailers have shifted away from providing quality goods and services toward raw consumerism. And in that environment, things like respect and customer service and privacy don't seem to matter. I don't think customer service itself is endangered -- Whole Foods Market is a good indicator it isn't -- but what about consumer privacy? Do you see any way for meaningful privacy to remain in today's computer-based marketplace?

JOHN: Not unless stringent privacy protection laws are passed.

SUNNI: I'd prefer that the market take it on, rather than more laws. Libertarians love to extol the virtues of free markets -- if people genuinely want certain things, a market will spring up to meet that demand, the thinking goes. But, the shackles of state regulation aside, the reality seems a bit more complicated than that. For example, I know that many individuals would happily exchange some degree of shopping convenience for greater privacy -- slower, old-fashioned cash registers that don't allow data-gathering, for example, or maybe needing to pay by cash instead of checks or credit/debit cards. But it's a very small market, that's also spread over the country. I think part of the small size is that many people simply aren't aware to what degree they're being tracked. What might it take for these ultra-niche markets, for lack of a better word, to start being served?

JOHN: That's the way capitalism works: entrepreneurs identify unmet market desires and needs and then fulfill the needs. Since needs and desires continually evolve there is always room for new entrepreneurs. Maybe there's an entrepreneurial opportunity for you here? Go for it!

SUNNI: [laughing] I think the last thing I need right now is another project! Or maybe I'm just having a hard time seeing myself as an entrepreneur. But, speaking of markets, you rode one -- the organic food niche -- on its rapid rise, both here in the U.S. and worldwide. How did you become interested in organic farming? What convinced you it's a better means of food production than the traditional -- not corporate -- farming methods?

JOHN: That question cannot be answered simply or persuasively to skeptics in only a couple of paragraphs. It would involve a detailed critique of our entire food production system and I'm not willing to do that today. Let me just make a few points on it and leave it.

SUNNI: Fair enough.

JOHN: The United States agricultural system is based upon the industrial model. It has adopted industrial techniques to maximize efficiency and productivity of agricultural production, which are the only values that are recognized within this particular system. If chemical fertilizers and pesticides increase productivity and lower costs, they are therefore "good". I'm not going to argue here or anywhere that increasing productivity and lowering costs are bad things in themselves. Producing food at lower costs is obviously a good thing. However, that is not the whole story here. There are other values in food production that are not recognized or valued in the industrial model. Some of these values include: the long-term health and fertility of the soil, the nutritional value and "life force value" of the food produced, the long-term sustainability of agriculture, the long-term effects on our health from small, but continual inputs of synthetic pesticides, the health and well-being of the farm workers, the purity and quality of our ground water, the health and well being of our livestock animals, and many other values. These other values are not seen or recognized in the price of the food produced under the industrial agricultural model. There is an information failure going on here. Many people intuitively recognize that organic agriculture partially corrects some of the flaws of the industrial system, even if they are not able to articulate well their reservations with the industrial model.

Defenders of the industrial agricultural model usually accuse organic proponents of being anti-scientific, irrational, against progress, etc. They seem to see themselves as Galileo standing against the Inquisition! I'm personally very pro-science and I'm happy to let science decide some of the arguments between the proponents of the industrial agricultural model and the organic agricultural model. Science is the best way we have to discover the truth. However, it is very important to realize that scientific knowledge often lags intuitive, experiential knowledge -- sometimes by many decades.

Let me give you just two examples on this: 1. Cigarettes. It took several decades for scientific knowledge to catch up to what the average person intuitively knew -- cigarettes are deadly and will eventually kill you. 2. Mad cow disease -- science initially said that the rendering process eliminated any risk of danger to livestock animals from eating the dead remains of other animals. However, intuition and common sense tell us that feeding ruminant animals (vegetarians) the dead remains of other livestock animals might have potentially unforeseen negative consequences. Turns out it did, and it's possible that millions of people have been exposed to mad cow disease this way. Alzheimer's disease and other forms of dementia have very similar symptoms to mad cow disease.

I believe that over the long term -- within my lifetime -- many and perhaps most of the claims that proponents of organic agricultural make will be vindicated by scientific research -- research which is now in either its very early stages or currently lacks the scientific methodologies to determine, such as the life force value or "chi" of various foods. Other claims that are intuitively obvious to me and many others will likely be proven, however. I fully expect science to show the importance of the connection between soil fertility and nutritional value of food. I expect science will eventually verify that organic foods are more nutritious, that continual inputs of low-grade synthetic pesticides have negative long-term health consequences, that eating factory farm livestock animals does not support long-term health and longevity, that farm workers at organic farms outlive farm workers at industrial farms, that pesticide runoff, and waste waters from livestock factory farms have deadly negative impacts on the water quality and the local ecosystems, etc. Consider the last one already scientifically proven. Livestock factory farms are environmental disasters.

Some of the criticisms of the industrial agricultural model will not be resolved by science. These are ethical criticisms. The best example is what we are doing to our livestock animals on the industrial factory farms. In the United States alone we slaughter over 10 billion livestock animals for food every single year! The great majority of these animals are raised in incredibly inhumane ways because this type of treatment maximizes productivity and lowers costs, and thus lowers costs to the consumer. But what about the animals? Do they count for nothing? Is it ethically right for a chicken or a pig to live its entire life in a very small cage, never seeing the sun or getting outdoors? I don't think it is right -- no matter how high the productivity is. Productivity and lower costs are not the only values that matter to me and to most other people.

In general, my answer is to let the market decide some of these questions. If people want to buy organic foods because they believe they are better for their personal health and better for the environment then they should have the right to do so. Whole Foods isn't seeking to make the industrial agricultural model illegal, but we do believe that there are millions of people who prefer the organic model for numerous reasons. We exist to fulfill those needs and desires of our customers. At the end of the day it isn't Whole Foods' duty and responsibility to prove anything about organic methods of agriculture. We're retailers and we exist to serve our customers to the best of our ability. Let the marketplace decide consumer preferences and let science continue to do its research to answer the unanswered questions.

SUNNI: A lot of food for thought there, John. What's your view of genetically modifying foods, both plant and animal? It seems to me that some opponents are overstating its potential danger, since many of our now-essential foods are the result of much more primitive genetic engineering -- going back thousands of years, sometimes.

JOHN: Another very complex question, Sunni. You're asking me the most difficult and complex questions that I have ever been asked in any interview before.

SUNNI: Thank you, John -- I take that as a high compliment!

JOHN: There are no simple answers to these questions. Just a few points here.

I disagree with the argument that the type of genetic engineering that is going on today is qualitatively the same as the evolution of various species through selective breeding in the past. Selective breeding always had built-in biological safeguards. There was always a certain kind of biological integrity to the species (the species barrier) that limited the ability to alter it. Genetic engineering changes this. Scientists are now able to combine genes from completely different species together with unforeseen, unknown, and unintended consequences. The risks definitely escalate now that the species barrier has been breached.

Should genetic engineering be illegal or banned? Many think so. I do not. However, there are serious ethical issues with genetic engineering that can't simply be dismissed as "anti-scientific" or "neo-Luddite". I don't believe we can allow just anything to go here. However, a detailed discussion is simply beyond the scope of this interview.

SUNNI: Sure; I understand that.

JOHN: Whole Foods has had a very consistent position on genetically engineered foods. Label them. Consumers, whether rightly or wrongly, are very concerned about GMOs. Don't they have the right to know whether they are eating them or not? We think they do and we support mandatory labeling so that consumers can make informed choices in the marketplace.

SUNNI: Some people see a significant portion of the environmental movement -- especially organic/sustainable farming and the position against genetic modification -- as being anti-technology or anti-progress. Another good example would be the relatively new elimination training idea -- that it's better for babies to go without diapers. The claim is that this method eliminates all the waste associated with diapers -- but it overlooks the increased likelihood of spreading disease, which of course is still a real problem in many third-world countries. Do you think the green movement is inherently anti-technology or -progress?

JOHN: Some greens are anti-technology and anti-progress -- don't forget anti-capitalist and anti-corporations too -- but I don't think this defines the entire movement. Mostly greens are concerned about environmental integrity and are deeply fearful about what the future may/will bring. Rather than seeing the future optimistically, they see it through the eyes of fear and of environmental decline. Virginia Postrel caught it well with her fabulous book The Future and its Enemies. There are in fact many things to be very concerned about and environmental integrity is certainly one of them. For those of us who love the natural world, who love farm animals, love whales, and who want to conserve and preserve wilderness around the world -- count me as yes on all of the above -- there is much that is going on that is very upsetting and needs to be changed. What sets me apart from many of the greens -- although I share their love for nature -- however, is that I believe that human freedom and free markets are critical components to the solution to our collective environmental challenges, while many of them believe they are the primary causes of our environmental problems. I believe a new paradigm is needed -- one that places freedom and capitalism as core values, but also recognizes that responsibility, care, and love must be core values as well. Many of our current environmental problems are simply the result of seeing nature through the eyes of the industrial metaphor -- lifeless and without intrinsic value, to be manipulated as we please. However, when we look through the eyes of love at other living beings, nature, and the larger-world environment we realize that we wish to conserve, nurture, and protect them -- and stop exploiting, manipulating, or destroying them.

SUNNI: Are there elements of it that you think are too extreme?

JOHN: Any element which uses violence to achieve its objectives is too extreme, in my opinion.

SUNNI: While visiting your ranch last year for a FLOW conference, I came across an article which described your transformation from vegetarian to vegan -- FastCompany has a very similar article online. I was impressed by a quote attributed to you, in which you said the best way to argue with an opponent is to completely understand his or her point of view. How often do you engage in that kind of pursuit, as you did with the duck woman?

JOHN: I continually do it. I'm committed to understanding, realizing, and experiencing truth. It is essential that we read books that disagree with our own personal viewpoints -- that challenge us, stretch us, upset us, and break us out of our comfortable world views, whatever they may be. I'm far less interested in being right or belonging to some school of thought than I am in personally learning and growing. Most people are afraid to open themselves to new ideas and new viewpoints because they are afraid it will require them to change. And they're right -- it will cause them to change. However, I enjoy this kind of change because I see it as personal growth. I became a vegan -- or almost a vegan, since I still eat eggs from my own chickens -- after I read the literature on animal welfare and animal rights. Many of my friends are unwilling to read these books because they literally don't wish to know what is going on. Why not? Because the knowledge may require them to change their diets and they aren't willing to take this risk. I desire to take these risks because I want to learn and grow.

SUNNI: It seems to me that many libertarians fail in outreach in part because of a failure to understand the opponent's view, and that a large part of that originates in discounting the importance of emotions. Would you agree? Got any ideas for improvements there?

JOHN: I definitely agree! Libertarians would be well served to develop their Emotional Intelligence (check out Daniel Goleman's book with this same title). Many -- not all, of course -- libertarians are hyper-rationalists, who have not yet gotten in touch with their deeper feelings. Their hearts have not fully opened to the reality of love. They're afraid of their emotions, afraid to be lose control, and to be overwhelmed by their feelings. I personally agree with the philosopher David Hume who said, "Reason is and ought to be the slave of the passions." Of course, the passions that I believe reason should be the slave of are love-based -- compassion, generosity, joy, and forgiveness -- not the fear-based emotions of envy, resentment, revenge, anger, and hatred. I believe that reason should be the slave of love. That's how I'm trying to live my life. This is a very difficult idea for many libertarians to accept because it means a shift in their consciousness. It means going beyond our ego-based reason, and most people are deeply addicted to their egos. When our hearts are open to the reality of love we are literally in a different -- I would argue higher -- state of consciousness. Love cannot be fully understood or grasped by the rational mind. It can only be experienced and when the rational mind is analyzing it and trying to understand it, then the actual experience of love is no longer present.

SUNNI: Yeah ... and I think fear plays into this, too. Many people have a fear of losing control, of indulging in feelings; some see that as weakness, while others probably think that if they give in, they won't be able to regain control. It's a hard balance for many people -- and especially for many libertarians, as you said. Speaking of balance, it wasn't that long ago that Whole Foods Market launched a new type of store that sounds to me like a blend of grocery shopping and entertainment. How's that effort going? How many more stores do you anticipate to upgrade?

JOHN: Our new store in downtown Austin is the largest and best store we've ever opened. It is doing very, very well for us. We will learn from our experiences with this store and continue improving both our new and existing stores. We constantly strive to continuously upgrade all of our stores. We try to improve every one of them continuously.

SUNNI: I don't remember whether it was in a news story or a personal email, but someone characterized that new store in Austin as being "scary". And I'll be honest, John, it doesn't sound like a store I'd like much. The Whole Foods Market press release, with its comment about the seafood department being "theater", doesn't have me eager to visit a store like the Austin one. Am I an old-fashioned curmudgeon who's going to be left behind with this new wave of shopping experience, or is this your vision for a new niche in the supermarket industry? [laughs]

JOHN: Well, you should visit the store first and then tell me what you think. I'm biased, of course, but I believe it is the finest food store in all of the United States. Sure, some people think it is too big and preferred the smaller old store. I first heard that 25 years ago when we relocated Safer Way -- 3,000 square feet -- to the first Whole Foods Market location -- 10,500 square feet. The best indication of customer satisfaction and dissatisfaction, however, is not anecdotal, but how people vote with their pocketbooks. They are voting very positively for the new larger store, which has broken a number of company sales records since it opened 2 months ago.

SUNNI: You're right -- can't argue with that! And I don't know when I'll be back in Austin, but when I am I'll check it out for myself. Guess your marketing copy just didn't work for me that time.

JOHN: Let me know when you next come to town so I can tour the store with you.

SUNNI: Will do -- and that's a very tempting justification for a road trip. The drive to Texas from here is mostly very scenic. I know that in addition to your corporate activism with Whole Foods Market, you recently started a new foundation, the Whole Planet Foundation. How's that going? I tried to find a web site for it, but was unable to ... is one forthcoming?

JOHN: The Whole Planet Foundation hasn't gone public yet. We will be doing our official public launch next October with a Global 5% Day at Whole Foods to initially fund it and the unveiling of the web site. All I'll say about it now is that we'll be working with the Grameen Bank and EARTH University to help empower poor people in all the communities that Whole Foods is currently trading with, beginning in Central America. I recommend reading Muhammed Yunnis' book Banker to the Poor, which tells the story of Grameen Bank in Bangladesh.

SUNNI: I remember hearing about that at the FLOW conference -- it is a fascinating and inspiring story. What sorts of things will the foundation be focusing on?

JOHN: Empowering poor people to better their lives and the lives of their families.

SUNNI: John, you're an excellent example of a pro-freedom person who's following his dream while apparently operating within the confines of a system that restricts many liberties. What advice would you give to other freedom-minded entrepreneurs who are just getting started?

JOHN: My advice is to follow your heart wherever it takes you. Choose love instead of fear. If you do, a wonderful life adventure awaits you!

SUNNI: Do you think working outside the state's channels -- not paying taxes, not bothering with licenses and inspections and such, among other things -- is a viable means of being effective?

JOHN: I think it is an excellent way to be fined, put out of business, and put in jail. I'm an entrepreneur and I don't wish to waste my limited time and energy fighting against issues that are less important to me. However, that's just my personal preference. Others may wish to resist idiotic regulations and laws more directly. To each his or her own.

SUNNI: What's your view of the short-term prospects -- 5 to 10 years -- for liberty?

JOHN: I'm not sure about the short-term prospects. However, the long-term prospects are excellent. Consider how the world was just 150 years ago. 150 years ago there was only one democracy in the entire world -- the United States. And the United States had legalized slavery, was committing genocide against the Native Americans, and women didn't have the right to vote. Now 150 years later, 60% of the nations of the world are democracies, slavery has been outlawed throughout the world, and women are increasingly empowered almost everywhere. Liberty has been on the rise. Look at Eastern Europe today versus 30 years ago -- liberty is well-rooted there now and that certainly wasn't the case when these countries were under the thumb of totalitarian communistic governments.

SUNNI: Yep, that's been amazing to see. Largely through ISIL, Lobo and I have made several friends in that part of the world, and although challenges are still there, it's always inspiring for me to think about what's happened -- and largely through peaceful activism. Here, a number of pro-freedom individuals think that Bush's actions are helping our cause, in that they're waking up a lot of people to the loss of liberty he's presided over. Do you see it that way?

JOHN: Bush has been a mixed bag for liberty in my opinion. The Patriot Act is a step back, of course. On the other hand I think it is difficult to argue that Afghanistan or Iraq had more liberty under the Taliban or Saddam than they have today.

SUNNI: Do you have any regrets regarding what it's taken for you to get where you are today?

JOHN: Not too many regrets. My life has so far been an incredibly wonderful adventure and it's getting better all the time. I am truly living a happy dream and wish the same for everyone else.

SUNNI: I believe you once told me that you enjoy hiking. What's been your best hiking trip so far?

JOHN: I through-hiked the entire Appalachian Trail in 2002. I took off 4.5 months from work to do it. That was the most fun. In terms of the most beautiful hike, I would have to say that last summer when we hiked the High Sierra portion of the Pacific Crest Trail wins the prize.

SUNNI: Wow ... both sound great. What other kinds of things do you enjoy in your leisure time?

JOHN: Besides long-distance hiking I love hanging out with my wife and my friends. I love reading and discovering and playing with new ideas. I love to play games of all types. I love music. I love cooking and eating good food. I love children. I love animals. I love a lot of things!

SUNNI: [laughing] I never would have guessed, John! No wonder you have few regrets. Who are some of the people who inspire, delight, and/or motivate you?

JOHN: That depends greatly upon the category of activity we might be talking about. The person I admire most in the world is my wife, Deborah. She is my main inspiration. When I was younger, my father was my mentor in business and in life. There are many, many others.

SUNNI: I know I've taken a lot of your time, John, and I appreciate every minute of it ... Before I go, is there anything else you'd like to share with my readers? Other projects I didn't mention, words of wisdom ...?

JOHN: The same advice I gave above: My advice is to follow your heart wherever it takes you. Choose love instead of fear. If you do, a wonderful life adventure awaits you! Carpe diem!

SUNNI: Thank you very much for all your time today, John. It's been very stimulating and thought-provoking talking with you, and I hope our trails cross in person again soon.

JOHN: It's been fun. Take care.

Categories: conscious capitalism

Rethinking the Social Responsibility of Business

By John Mackey, September 28, 2005  |  More Posts by John Mackey

A debate reprinted with permission from Reason magazine featuring Milton Friedman, Whole Foods' John Mackey, and Cypress Semiconductor's T.J. Rodgers.

 

Thirty-five years ago, Milton Friedman wrote a famous article for The New York Times Magazine whose title aptly summed up its main point: "The Social Responsibility of Business Is to Increase Its Profits." The future Nobel laureate in economics had no patience for capitalists who claimed that "business is not concerned 'merely' with profit but also with promoting desirable 'social' ends; that business has a 'social conscience' and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of re formers."

 

Friedman, now a senior research fellow at the Hoover Institution and the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, wrote that such people are "preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting pup pets of the intellectual forces that have been undermining the basis of a free society these past decades."

 

John Mackey, the founder and CEO of Whole Foods, is one businessman who disagrees with Friedman. A self-described ardent libertarian whose conversation is peppered with references to Ludwig von Mises and Abraham Maslow, Austrian economics and astrology, Mackey believes Friedman's view is too narrow a description of his and many other businesses' activities. As important, he argues that Friedman's take woefully undersells the humanitarian dimension of capitalism.

 

In the debate that follows, Mackey lays out his personal vision of the social responsibility of business. Friedman responds, as does T.J. Rodgers, the founder and CEO of Cypress Semiconductor and the chief spokesman of what might be called the tough love school of laissez faire. Dubbed "one of America's toughest bosses" by Fortune, Rodgers argues that corporations add far more to society by maximizing "long-term shareholder value" than they do by donating time and money to charity.

 

Reason offers this exchange as the starting point of a discussion that should be intensely important to all devotees of free minds and free markets. Subscribe to Reason.

 

Putting Customers Ahead of Investors - John Mackey

 

In 1970 Milton Friedman wrote that "there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." That's the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders

 

I strongly disagree. I'm a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of the business is to maximize profits. But that's not the purpose for other stakeholders-for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.

 

My argument should not be mistaken for a hostility to profit. I believe I know something about creating shareholder value. When I co-founded Whole Foods Market 27 years ago, we began with $45,000 in capital; we only had $250,000 in sales our first year. During the last 12 months we had sales of more than $4.6 billion, net profits of more than $160 million, and a market capitalization over $8 billion.

 

But we have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business. In my marriage, my wife's happiness is an end in itself, not merely a means to my own happiness; love leads me to put my wife's happiness first, but in doing so I also make myself happier. Similarly, the most successful businesses put the customer first, ahead of the investors. In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of.

 

Not that we're only concerned with customers. At Whole Foods, we measure our success by how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment. Our philosophy is graphically represented in the opposite column.

 

There is, of course, no magical formula to calculate how much value each stakeholder should receive from the company. It is a dynamic process that evolves with the competitive marketplace. No stakeholder remains satisfied for long. It is the function of company leadership to develop solutions that continually work for the common good.

 

Many thinking people will readily accept my arguments that caring about customers and employees is good business. But they might draw the line at believing a company has any responsibility to its community and environment. To donate time and capital to philanthropy, they will argue, is to steal from the investors. After all, the corporation's assets legally belong to the investors, don't they? Management has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don't maximize shareholder value are violations of this duty. If you feel altruism towards other people, you should exercise that altruism with your own money, not with the assets of a corporation that doesn't belong to you.

 

This position sounds reasonable. A company's assets do belong to the investors, and its management does have a duty to manage those assets responsibly. In my view, the argument is not wrong so much as it is too narrow.

 

First, there can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors. For example: In addition to the many thousands of small donations each Whole Foods store makes each year, we also hold five 5% Days throughout the year. On those days, we donate 5 percent of a store's total sales to a nonprofit organization. While our stores select worthwhile organizations to support, they also tend to focus on groups that have large membership lists, which are contacted and encouraged to shop our store that day to support the organization. This usually brings hundreds of new or lapsed customers into our stores, many of whom then become regular shoppers. So a 5% Day not only allows us to support worthwhile causes, but is an excellent marketing strategy that has benefited Whole Foods investors immensely.

 

That said, I believe such programs would be completely justifiable even if they produced no profits and no P.R. This is because I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company. It is the entrepreneurs who create a company, who bring all the factors of production together and coordinate it into viable business. It is the entrepreneurs who set the company strategy and who negotiate the terms of trade with all of the voluntarily cooperating stakeholders—including the investors. At Whole Foods we "hired" our original investors. They didn't hire us.

 

We first announced that we would donate 5 percent of the company's net profits to philanthropy when we drafted our mission statement, back in 1985. Our policy has therefore been in place for over 20 years, and it predates our IPO by seven years. All seven of the private investors at the time we created the policy voted for it when they served on our board of directors. When we took in venture capital money back in 1989, none of the venture firms objected to the policy. In addition, in almost 14 years as a publicly traded company, almost no investors have ever raised objections to the policy. How can Whole Foods' philanthropy be "theft" from the current investors if the original owners of the company unanimously approved the policy and all subsequent investors made their investments after the policy was in effect and well publicized?

 

The shareholders of a public company own their stock voluntarily. If they don't agree with the philosophy of the business, they can always sell their investment, just as the customers and employees can exit their relationships with the company if they don't like the terms of trade. If that is unacceptable to them, they always have the legal right to submit a resolution at our annual shareholders meeting to change the company's philanthropic philosophy. A number of our company policies have been changed over the years through successful shareholder resolutions.

 

Another objection to the Whole Foods philosophy is where to draw the line. If donating 5 percent of profits is good, wouldn't 10 percent be even better? Why not donate 100 percent of our profits to the betterment of society? But the fact that Whole Foods has responsibilities to our community doesn't mean that we don't have any responsibilities to our investors. It's a question of finding the appropriate balance and trying to create value for all of our stakeholders. Is 5 percent the "right amount" to donate to the community? I don't think there is a right answer to this question, except that I believe 0 percent is too little. It is an arbitrary percentage that the co-founders of the company decided was a reasonable amount and which was approved by the owners of the company at the time we made the decision. Corporate philanthropy is a good thing, but it requires the legitimacy of investor approval. In my experience, most investors understand that it can be beneficial to both the corporation and to the larger society.

 

That doesn't answer the question of why we give money to the community stakeholder. For that, you should turn to one of the fathers of free-market economics, Adam Smith. The Wealth of Nations was a tremendous achievement, but economists would be well served to read Smith's other great book, The Theory of Moral Sentiments. There he explains that human nature isn't just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest. For many people, they are more important.

 

When we are small children we are egocentric, concerned only about our own needs and desires. As we mature, most people grow beyond this egocentrism and begin to care about others-their families, friends, communities, and countries. Our capacity to love can expand even further: to loving people from different races, religions, and countries—potentially to unlimited love for all people and even for other sentient creatures. This is our potential as human beings, to take joy in the flourishing of people everywhere. Whole Foods gives money to our communities because we care about them and feel a responsibility to help them flourish as well as possible.

 

The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the "invisible hand" to generate positive results for society. The "brand" of capitalism is in terrible shape throughout the world, and corporations are widely seen as selfish, greedy, and uncaring. This is both unfortunate and unnecessary, and could be changed if businesses and economists widely adopted the business model that I have outlined here.

 

To extend our love and care beyond our narrow self-interest is antithetical to neither our human nature nor our financial success. Rather, it leads to the further fulfillment of both. Why do we not encourage this in our theories of business and economics? Why do we restrict our theories to such a pessimistic and crabby view of human nature? What are we afraid of?

 

 

Making Philanthropy Out of Obscenity -Milton Friedman

 

By pursuing his own interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. -Adam Smith, The Wealth of Nations

 

The differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical. Strip off the camouflage, and it turns out we are in essential agreement. Moreover, his company, Whole Foods Market, behaves in accordance with the principles I spelled out in my 1970 New York Times Magazine article.

 

With respect to his company, it could hardly be otherwise. It has done well in a highly competitive industry. Had it devoted any significant fraction of its resources to exercising a social responsibility unrelated to the bottom line, it would be out of business by now or would have been taken over. Here is how Mackey himself describes his firm's activities:

  1. "The most successful businesses put the customer first, instead of the investors" (which clearly means that this is the way to put the investors first).
  2. "There can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors."

Compare this to what I wrote in 1970:

 

"Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.

 

"To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government.

 

"In each of these…cases, there is a strong temptation to rationalize these actions as an exercise of 'social responsibility.' In the present climate of opinion, with its widespread aversion to 'capitalism,' 'profits,' the 'soulless corporation' and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.

 

"It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a 'social responsibility'! If our institutions and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them."

 

I believe Mackey's flat statement that "corporate philanthropy is a good thing" is flatly wrong. Consider the decision by the founders of Whole Foods to donate 5 percent of net profits to philanthropy. They were clearly within their rights in doing so. They were spending their own money, using 5 percent of one part of their wealth to establish, thanks to corporate tax provisions, the equivalent of a 501c(3) charitable foundation, though with no mission statement, no separate by-laws, and no provision for deciding on the beneficiaries. But what reason is there to suppose that the stream of profit distributed in this way would do more good for society than investing that stream of profit in the enterprise itself or paying it out as dividends and letting the stockholders dispose of it? The practice makes sense only because of our obscene tax laws, whereby a stockholder can make a larger gift for a given after-tax cost if the corporation makes the gift on his behalf than if he makes the gift directly. That is a good reason for eliminating the corporate tax or for eliminating the deductibility of corporate charity, but it is not a justification for corporate charity.

 

Whole Foods Market's contribution to society-and as a customer I can testify that it is an important one-is to enhance the pleasure of shopping for food. Whole Foods has no special competence in deciding how charity should be distributed. Any funds devoted to the latter would surely have contributed more to society if they had been devoted to improving still further the former.

 

Finally, I shall try to explain why my statement that "the social responsibility of business [is] to increase its profits" and Mackey's statement that "the enlightened corporation should try to create value for all of its constituencies" are equivalent.

 

Note first that I refer to social responsibility, not financial, or accounting, or legal. It is social precisely to allow for the constituencies to which Mackey refers. Maximizing profits is an end from the private point of view; it is a means from the social point of view. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enables separated knowledge to assure that each resource is used for its most valued use, and is combined with other resources in the most efficient way.

 

Of course, this is abstract and idealized. The world is not ideal. There are all sorts of deviations from the perfect market-many, if not most, I suspect, due to government interventions. But with all its defects, the current largely free-market, private-property world seems to me vastly preferable to a world in which a large fraction of resources is used and distributed by 501c(3)s and their corporate counterparts.

 

Put Profits First -T.J. Rodgers

 

John Mackey's article attacking corporate profit maximization could not have been written by "a free market libertarian," as claimed. Indeed, if the examples he cites had not identified him as the author, one could easily assume the piece was written by Ralph Nader. A more accurate title for his article is "How Business and Profit Making Fit Into My Overarching Philosophy of Altruism."

 

Mackey spouts nonsense about how his company hired his original investors, not vice versa. If Whole Foods ever falls on persistent hard times-perhaps when the Luddites are no longer able to hold back the genetic food revolution using junk science and fear-he will quickly find out who has hired whom, as his investors fire him.

 

Mackey does make one point that is consistent with, but not supportive of, free market capitalism. He knows that shareholders own his stock voluntarily. If they don't like the policies of his company, they can always vote to change those policies with a shareholder resolution or simply sell the stock and buy that of another company more aligned with their objectives. Thus, he informs his shareholders of his objectives and lets them make a choice on which stock to buy. So far, so good.

 

It is also simply good business for a company to cater to its customers, train and retain its employees, build long-term positive relationships with its suppliers, and become a good citizen in its community, including performing some philanthropic activity. When Milton Friedman says a company should stay "within the rules of the game" and operate "without deception or fraud," he means it should deal with all its various constituencies properly in order to maximize long-term shareholder value. He does not mean that a company should put every last nickel on the bottom line every quarter, regardless of the long-term consequences.

 

My company, Cypress Semiconductor, has won the trophy for the Second Harvest Food Bank competition for the most food donated per employee in Silicon Valley for the last 13 consecutive years (1 million pounds of food in 2004). The contest creates competition among our divisions, leading to employee involvement, company food drives, internal social events with admissions "paid for" by food donations, and so forth. It is a big employee morale builder, a way to attract new employees, good P.R. for the company, and a significant benefit to the community-all of which makes Cypress a better place to work and invest in. Indeed, Mackey's own proud example of Whole Foods' community involvement programs also made a profit.

 

But Mackey's subordination of his profession as a businessman to altruistic ideals shows up as he attempts to negate the empirically demonstrated social benefit of "self-interest" by defining it narrowly as "increasing short-term profits." Why is it that when Whole Foods gives money to a worthy cause, it serves a high moral objective, while a company that provides a good return to small investors-who simply put their money into their own retirement funds or a children's college fund-is somehow selfish? It's the philosophy that is objectionable here, not the specific actions. If Mackey wants to run a hybrid business/charity whose mission is fully disclosed to his shareholders-and if those shareholder-owners want to support that mission-so be it. But I balk at the proposition that a company's "stakeholders" (a term often used by collectivists to justify unreasonable demands) should be allowed to control the property of the shareholders. 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.

 

Then there is the arrogant proposition that if other corporations would simply emulate the higher corporate life form defined by Whole Foods, the world would be better off. After all, Mackey says corporations are viewed as "selfish, greedy, and uncaring." I, for one, consider free market capitalism to be a high calling, even without the infusion of altruism practiced by Whole Foods.

 

If one goes beyond the sensationalistic journalism surrounding the Enron-like debacles, one discovers that only about 10 to 20 public corporations have been justifiably accused of serious wrongdoing. That's about 0.1 percent of America's 17,500 public companies. What's the failure rate of the publications that demean business? (Consider the New York Times scandal involving manufactured stories.) What's the percentage of U.S. presidents who have been forced or almost forced from office? (It's 10 times higher than the failure rate of corporations.) What percentage of our congressmen have spent time in jail? The fact is that despite some well-publicized failures, most corporations are run with the highest ethical standards-and the public knows it. Public opinion polls demonstrate that fact by routinely ranking businessmen above journalists and politicians in esteem.

 

I am proud of what the semiconductor industry does-relentlessly cutting the cost of a transistor from $3 in 1960 to three-millionths of a dollar today. Mackey would be keeping his business records with hordes of accountants on paper ledgers if our industry didn't exist. He would have to charge his poorest customers more for their food, pay his valued employees less, and cut his philanthropy programs if the semiconductor industry had not focused so relentlessly on increasing its profits, cutting his costs in the process. Of course, if the U.S. semiconductor industry had been less cost-competitive due to its own philanthropy, the food industry simply would have bought cheaper computers made from Japanese and Korean silicon chips (which happened anyway). Layoffs in the nonunion semiconductor industry were actually good news to Whole Foods' unionized grocery store clerks. Where was Mackey's sense of altruism when unemployed semiconductor workers needed it? Of course, that rhetorical question is foolish, since he did exactly the right thing by ruthlessly reducing his recordkeeping costs so as to maximize his profits.

 

I am proud to be a free market capitalist. And I resent the fact that Mackey's philosophy demeans me as an egocentric child because I have refused on moral grounds to embrace the philosophies of collectivism and altruism that have caused so much human misery, however tempting the sales pitch for them sounds.

 

Profit Is the Means, Not End -John Mackey

 

Let me begin my response to Milton Friedman by noting that he is one of my personal heroes. His contributions to economic thought and the fight for freedom are without parallel, and it is an honor to have him critique my article.

 

Friedman says "the differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical." But are we essentially in agreement? I don't think so. We are thinking about business in entirely different ways.

 

Friedman is thinking only in terms of maximizing profits for the investors. If putting customers first helps maximize profits for the investors, then it is acceptable. If some corporate philanthropy creates goodwill and helps a company "cloak" its self-interested goals of maximizing profits, then it is acceptable (although Friedman also believes it is "hypocritical"). In contrast to Friedman, I do not believe maximizing profits for the investors is the only acceptable justification for all corporate actions. The investors are not the only people who matter. Corporations can exist for purposes other than simply maximizing profits.

 

As for who decides what the purpose of any particular business is, I made an important argument that Friedman doesn't address: "I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company." Whole Foods Market was not created solely to maximize profits for its investors, but to create value for all of its stakeholders. I believe there are thousands of other businesses similar to Whole Foods (Medtronic, REI, and Starbucks, for example) that were created by entrepreneurs with goals beyond maximizing profits, and that these goals are neither "hypocritical" nor "cloaking devices" but are intrinsic to the purpose of the business.

 

I will concede that many other businesses, such as T.J. Rodgers' Cypress Semiconductor, have been created by entrepreneurs whose sole purpose for the business is to maximize profits for their investors. Does Cypress therefore have any social responsibility besides maximizing profits if it follows the laws of society? No, it doesn't. Rodgers apparently created it solely to maximize profits, and therefore all of Friedman's arguments about business social responsibility become completely valid. Business social responsibility should not be coerced; it is a voluntary decision that the entrepreneurial leadership of every company must make on its own. Friedman is right to argue that profit making is intrinsically valuable for society, but I believe he is mistaken that all businesses have only this purpose.

 

While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, I take the exact opposite view: Making high profits is the means to the end of fulfilling Whole Foods' core business mission. We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can't fulfill this mission unless we are highly profitable. High profits are necessary to fuel our growth across the United States and the world. Just as people cannot live without eating, so a business cannot live without profits. But most people don't live to eat, and neither must a businesses live just to make profits.

 

Toward the end of his critique Friedman says his statement that "the social responsibility of business [is] to increase its profits" and my statement that "the enlightened corporation should try to create value for all of its constituencies" are "equivalent." He argues that maximizing profits is a private end achieved through social means because it supports a society based on private property and free markets. If our two statements are equivalent, if we really mean the same thing, then I know which statement has the superior "marketing power." Mine does.

 

Both capitalism and corporations are misunderstood, mistrusted, and disliked around the world because of statements like Friedman's on social responsibility. His comment is used by the enemies of capitalism to argue that capitalism is greedy, selfish, and uncaring. It is right up there with William Vanderbilt's "the public be damned" and former G.M. Chairman Charlie Wilson's declaration that "what's good for the country is good for General Motors, and vice versa." If we are truly interested in spreading capitalism throughout the world (I certainly am), we need to do a better job marketing it. I believe if economists and business people consistently communicated and acted on my message that "the enlightened corporation should try to create value for all of its constituencies," we would see most of the resistance to capitalism disappear.

 

Friedman also understands that Whole Foods makes an important contribution to society besides simply maximizing profits for our investors, which is to "enhance the pleasure of shopping for food." This is why we put "satisfying and delighting our customers" as a core value whenever we talk about the purpose of our business. Why don't Friedman and other economists consistently teach this idea? Why don't they talk more about all the valuable contributions that business makes in creating value for its customers, for its employees, and for its communities? Why talk only about maximizing profits for the investors? Doing so harms the brand of capitalism.

 

As for Whole Foods' philanthropy, who does have "special competence" in this area? Does the government? Do individuals? Libertarians generally would agree that most bureaucratic government solutions to social problems cause more harm than good and that government help is seldom the answer. Neither do individuals have any special competence in charity. By Friedman's logic, individuals shouldn't donate any money to help others but should instead keep all their money invested in businesses, where it will create more social value.

 

The truth is that there is no way to calculate whether money invested in business or money invested in helping to solve social problems will create more value. Businesses exist within real communities and have real effects, both good and bad, on those communities. Like individuals living in communities, businesses make valuable social contributions by providing goods and services and employment. But just as individuals can feel a responsibility to provide some philanthropic support for the communities in which they live, so too can a business. The responsibility of business toward the community is not infinite, but neither is it zero. Each enlightened business must find the proper balance between all of its constituencies: customers, employees, investors, suppliers, and communities.

 

While I respect Milton Friedman's thoughtful response, I do not feel the same way about T.J. Rodgers' critique. It is obvious to me that Rodgers didn't carefully read my article, think deeply about my arguments, or attempt to craft an intelligent response. Instead he launches various ad hominem attacks on me, my company, and our customers. According to Rodgers, my business philosophy is similar to those of Ralph Nader and Karl Marx; Whole Foods Market and our customers are a bunch of Luddites engaging in junk science and fear mongering; and our unionized grocery clerks don't care about layoffs of workers in Rodgers' own semiconductor industry.

 

For the record: I don't agree with the philosophies of Ralph Nader or Karl Marx; Whole Foods Market doesn't engage in junk science or fear mongering, and neither do 99 percent of our customers or vendors; and of Whole Foods' 36,000 employees, exactly zero of them belong to unions, and we are in fact sorry about layoffs in his industry.

 

When Rodgers isn't engaging in ad hominem attacks, he seems to be arguing against a leftist, socialist, and collectivist perspective that may exist in his own mind but does not appear in my article. Contrary to Rodgers' claim, Whole Foods is running not a "hybrid business/charity" but an enormously profitable business that has created tremendous shareholder value.

 

Of all the food retailers in the Fortune 500 (including Wal-Mart), we have the highest profits as a percentage of sales, as well as the highest return on invested capital, sales per square foot, same-store sales, and growth rate. We are currently doubling in size every three and a half years. The bottom line is that Whole Foods stakeholder business philosophy works and has produced tremendous value for all of our stakeholders, including our investors.

 

In contrast, 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.

 

Rodgers says with passion, "I am proud of what the semiconductor industry does-relentlessly cutting the cost of a transistor from $3 in 1960 to three-millionths of a dollar today." Rodgers is entitled to be proud. What a wonderful accomplishment this is, and the semiconductor industry has indeed made all our lives better. Then why not consistently communicate this message as the purpose of his business, instead of talking all the time about maximizing profits and shareholder value? Like medicine, law, and education, business has noble purposes: to provide goods and services that improve its customers' lives, to provide jobs and meaningful work for employees, to create wealth and prosperity for its investors, and to be a responsible and caring citizen.

 

Businesses such as Whole Foods have multiple stakeholders and therefore have multiple responsibilities. But the fact that we have responsibilities to stakeholders besides investors does not give those other stakeholders any "property rights" in the company, contrary to Rodgers' fears. The investors still own the business, are entitled to the residual profits, and can fire the management if they wish. A doctor has an ethical responsibility to try to heal her patients, but that responsibility doesn't mean her patients are entitled to receive a share of the profits from her practice.

 

Rodgers probably will never agree with my business philosophy, but it doesn't really matter. The ideas I'm articulating result in a more robust business model than the profit-maximization model that it competes against, because they encourage and tap into more powerful motivations than self-interest alone. These ideas will triumph over time, not by persuading intellectuals and economists through argument but by winning the competitive test of the marketplace. Someday businesses like Whole Foods, which adhere to a stakeholder model of deeper business purpose, will dominate the economic landscape. Wait and see.

 

Read comments at Reason's Hit and Run blog.

Categories: conscious capitalism, social responsibility

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