Whole Foods’ John Mackey on Capitalism’s Moral Code

SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. I’m talking today with John Mackey, the CEO of Whole Foods. He is the author, with Raj Sisodia, of the new book, Conscious Capitalism. John, thanks so much for talking with us today.

JOHN MACKEY: Thanks for having me on.

SARAH GREEN: John, before we go further into the ideas in the book, I wanted to ask you about your personal transition, which you talk about a little bit in the introduction from early in life being a sort of activist to then evolving intellectually to become a person who is a very successful entrepreneur. How did that intellectual journey really happen? What shaped that?

JOHN MACKEY: Yes. Well, of course, I would not describe myself as having been an activist when I was younger. I’m probably more of an activist today than I was back when I was in my early twenties.

SARAH GREEN: That was my word. Sorry about that.

JOHN MACKEY: Yeah, but I think it’s true say that my politics would be classified as liberal, progressive, social democratic. Back in my early twenties that was the air that I breathed in Austin back then in the middle ’70s. And I thought business was fundamentally, basically, selfish and greedy, I mean, all about making money and profits and certainly not working for the collective good of society.

I lived in a housing co-op for a couple of years. I was a member of three food co-ops at different times. So I really was, even in my very early ’20s, searching for a better way for society to be and for business to operate.

But I became disillusioned with that philosophy. When the co-op movement– I just found the co-ops were very politicized and, at least at that time, they seemed to be a lot more interested in what companies to boycott and which products not to sell than they were in terms of really creating a better customer experience. So I came to the conclusion that I thought I could do a better job. I thought I could create a store that created more value for the customers that we traded with and the people that work there.

So I started a small store called Safer Way back in 1978, not by myself. My co-founder of Safer Way was my girlfriend at that time, Renee Lawson. We did Safer Way for a couple of years and managed to lose half the money that we had in the first two years.

We started with $45,000 and we lost $23,000 at the end of year one and eked out a $5,000 profit in year two. And that was with Renee and I basically living on $200 a month. We had to move into the store. In fact, we lived in the third floor in the office there.

And yet my consciousness shifted, you might say, because what I believed about business was proven to be wrong. And we didn’t have any coercive power. Everybody that traded with us did so voluntarily. And if we didn’t give them good quality and good service and good prices, they weren’t going to trade with us.

And nobody was forced to work with us. People worked with us because they either liked the job or they wanted the pay and the benefits that we offered. And if they found a better job, they would quit. None of our suppliers had to trade with us. They did so because they thought it was in their best interest to do so.

So what I found that the essence of business was basically based on voluntary exchange for mutual benefit. That was sort of a revelatory idea that business isn’t really all about selfishness and cheating people. I mean, if you cheat people, they find out about it eventually and they don’t want to do business with you anymore.

So I sort of went through a gradual reevaluation of the way I thought about business now that I was doing business. I wasn’t just outside of it judging it and criticizing it. And then as I tried to learn about how to be a better business person– I read a lot of books because I had no business background.

As I was reading those books, somewhere along the line I came across various free enterprise thinkers and economists, people like Friedrich Hayek and Ludwig von Mises and Milton Friedman, Murray Rothbard. And I read, I don’t know, dozens and dozens of books about society and about the way the world worked and about economics and business. And it all made sense to me now that I was actually a business person, so identifying myself differently, thinking about business differently.

So, yeah, I let go of the politics that I’d had for many years and came up with a new world view, one that has certainly evolved in the last 30 plus years. But the fundamentals are still basically there, that business is the great creator value for other people and it’s fundamentally a force for good in the world. And I just don’t think most people understand that.

SARAH GREEN: I think one of the ways that I thought was really interesting was your discussion of Adam Smith. And in the book you talk a little bit about how he was sort of intellectually hijacked. Tell us your thoughts on Adam Smith and how that happened and what we should really get from his writings.

JOHN MACKEY: Well Adam Smith, he was a genius. He was way ahead of his time. And he wrote two great books.

You know, he was working on a third book which never got done and would be interesting to see– if he’d lived long enough– to see that book and the completion, if the world would be a different place today. His first book was called The Theory of Moral Sentiments and it was a philosophy of ethics. And it had some cachet during the time that he wrote it. But the world was a different place.

And when he wrote his second book, The Wealth of Nations, which became kind of the economic bible for early capitalism in the late 18th and 19th centuries, his ethics were completely forgotten. And what happened in my opinion is that the society at that time was very much grounded in the Judeo Christian ethics. And that sort of under-girded the initial capitalistic revolution and moderate it a little bit.

So Smith’s ideas on empathy and care and compassion for others was just ignored. And then without that under-girding of ethics, as the Judeo Christian ethics began it’s basically attack or seem to be less and less relevant to the world as it evolved from Marx to Darwin and Freud, the idea that the ethical foundation of capitalism began to be eroded. Capitalism, from a conscious standpoint, never really had a good foundation other than it was piggybacking on the inherited Judeo Christian ethics.

As those ethics began to be eroded, capitalism began to be attacked as fundamentally selfish and greedy. And it didn’t have in it’s theoretical foundation any good response to that. And so particularly when the people like Karl Marx and then later the Darwinian disciples began to attack capitalism, it just didn’t have good responses.

I mean, most business people, they’re not intellectuals. They’re not thinking about this stuff. They’re just out their trading and they’re working hard.

And so I really feel like there was a huge mistake made back then. If Adam Smith’s ethical philosophy had been synthesized into his economic philosophy, the world might be, probably would be, a very different place today.

In a lot of ways what we’re trying to do with our book is get people to think about a different type of ethics to ground business in than what we have today, that the narrative that business is all about money and profit is just fundamentally wrong. And it’s doing great damage to the world, actually, because if business is not allowed to create value because it’s fundamentally selfish, greedy, and it’s a sociopathic institution, then our world is not going to fully escape from poverty and prosperity. It’s going to reverse.

I mean, we’re seeing it in America right now. Our prosperity is in decline. If you just look at what’s happened in the last five years, it’s not a good trend line. So I do think the basic philosophy of ethical philosophy that business needs and capitalism needs has been hijacked. The defenders have not done a good job of defending it. You cannot defend business strictly on the basis of self interest.

And I sometimes like to explain this by an analogy that most people get. And if you ask what the purpose of a doctor is, no one answers that question by saying, well, the purpose of doctors is to maximize profits, right? The doctors are well paid. They earn a very good living. But, obviously, the purpose of doctors is to heal people. That’s their function in society is to heal sick people or people that are injured.

If you ask what the purpose of teachers is, educate people. If you ask what the purpose of a journalist is, hopefully you’ll get some answer to the truth is out there and we’re trying to uncover it. I’m not sure journalism hasn’t moved away from that purpose, but I would argue that could and should be its purpose.

If you ask the purpose of architects, they design buildings. Engineers construct things. I mean, even lawyers promote, or at least taught in law school that they’re promoting a more just society.

Only business people the answer is the purpose of business is to make money. And it’s just not the right answer. And every business has the potential for some other higher purpose besides just making money.

Of course, it has to make money just like my body has to make red blood cells if I’m going to live. But the purpose of my life is not to produce red blood cells. My purpose is more transcendent than that.

Similarly, business has that purpose for some type of larger contribution to society. So business people need to begin thinking in those terms. And so purpose is a first tenant that we explain conscious capitalism with. It’s absolutely essential that business rediscover what its purpose is, why it exists. What is the value that it creating for other people? What is its contribution to the larger society?

SARAH GREEN: Why do you think that so many business people seem hesitant to come out and actually say, yes, I have a higher purpose than making money or I create value and money is a byproduct. Why are we still having this sort of shareholder value conversation?

JOHN MACKEY: That’s a good question. I think there are probably several reasons. One reason is that that’s what they’re taught. I mean, that’s what they’re taught in most business schools.

I’ve talked in dozens of business schools around the United States, and I’ve talked to students and their professors. And you look at the textbooks. The assumed purpose of business is to make money for the shareholders.

It’s not debated. It’s not discussed. It’s taken as a given. It’s the air that they breathe.

The economists have taught that for centuries. If you go back and study the history of economic thought, that was always taken to be the starting point. Again, because the ethics were taken for granted, it was thought that business was about making money. So that’s been the narrative.

Thirdly, I think for business people, they don’t want to be seen as– they may have some little bit of a macho thing. I don’t want to be seen as weak or soft headed. Business people, they want to think of themselves as kind of tough and they can make the tough decisions.

So when you start talking about purpose, some business people, a lot of business people– I think it’s changing, I think, for a good reason because a lot of women are now in business. And I think that’s helping to transform this way of thinking. But it hasn’t been thought to be good. If you’re weak, you’re going to get run over.

They’ve got a lot of war metaphors in business. Business is about crushing the competition and rolling over people. And the whole business enterprise has got war metaphors or it’s got Darwinian metaphors. Kill or be killed. Survival of the fittest. Only the paranoid survive.

So you’ve got a mythology in business where this exists. And that’s why I say we need to change the narrative. And that means, in a sense, we need to change the mythology. It no longer serves us. It’s really holding back the potential of humanity.

And it’s really holding back business’s potential to be the force– that’s why the subtitle of our book is Liberating The Heroic Spirit of Business. By changing the narrative, by changing the mythology, we can liberate business to consciously go out there and create value for all these stakeholders from a sense of higher purpose. And if more and more businesses begin to think that way, the world is going to evolve upward in a very rapid pace.

SARAH GREEN: Most of what we’ve been talking about today has been at a pretty high level, the 30,000 foot level. But I’d like to switch gears and talk a little bit now about something much more concrete, which is the Whole Foods market connection with customers because it seems that you’ve really managed to forge a very strong connection with customers. So, personal example is that the town where I live in, Somerville, Massachusetts, is getting a Whole Foods.

It was recently announced. And everyone seems very excited by this, which I find really interesting because Somerville is the kind of community that is sort of proudly shopping local, always working to keep out big national chains, and yet Whole Foods is clearly an exception to that attitude. So tell me about some of the concrete things that you’ve done to make sure that you can have that kind of connection with customers even though you’re a national chain.

JOHN MACKEY: I think that Whole Foods does have higher purposes. We take them very seriously. We don’t exist primarily to maximize profits.

We’re fulfilling the mission that we set for ourselves of helping people to live healthier lives, to hopefully reverse this obesity crisis we have in America. Whole Foods does feel this sense of responsibility to try to make a difference. And that filters through our team member base to our customers. We really are united around kind of our mission as an organization. That really makes a difference.

Our culture’s very unique. We’re very decentralized. And I think one of the reasons people that know Whole Foods don’t freak out about a big chain coming– it’s not like a McDonald’s coming into a town or a Walmart or even a Starbucks.

Our stores are all unique. They’re all different. None of them look exactly the same as any other store because we don’t have a prototype that we just replicate and repeat over and over and over again. Each store is locally created to fit that community as best we can determine from the local people that we have there working there.

So the people are very empowered in terms of the products that we pick. We do really focus on a lot of local products. We support local vendors. We even make loans to local vendors to help them be successful.

People really like working for Whole Foods. Our turnover rates are extremely low for a food retailer, like under 10%. We’ve got great health benefits.

And we’re customer centric in the way we approach our customers. We really think they’re the most important stakeholders. We’re very dedicated to trying to provide higher quality service to them and a better experience. Our stores are designed to be beautiful so that people will enjoy being in them, not just sort of a warehouse look, which is what so many retailers have done to make it look cheap.

And then, of course, we’re very community oriented. The community stakeholder is not an afterthought. At Whole Foods it’s one of our most important stakeholders. In 2012 we gave away 11% of our profits to nonprofit organizations. We are highly supportive of this.

And so, again, Whole Foods is a good neighbor and we create great jobs for people and we create good value for customers. There’s sort of an interesting effect we’ve discovered as well. Whenever we go into an area, it raises the property values.

I mean, we’ve been criticized for this. In the Boston area, for example, we went into Jamaica Plains because so many activists didn’t want property values to go up. But, of course, people that own homes want to see the property values go up. And they want to see their investments and their schools to get better. And they want to see improvement.

And this generally is what happens when we go into any kind of market. It gradually but steadily improves. And we, in a sense, help a community to evolve. And it’s sort of an unintended consequence of us being there but one that, not everybody, but most people really appreciate.

SARAH GREEN: Yeah, I did wish that we had actually bought the place we were thinking of buying last year when I heard that. But I missed that boat.

JOHN MACKEY: You haven’t missed the boat yet because we’re not open yet. Once we get open, it’s going to be even more valuable.

SARAH GREEN: I have a limited window. Why do you think that more businesses don’t operate that way? I mean, is it just kind of hard and people aren’t really good at it or they’re just not thinking about it? I mean, all the things you laid out sound like great ideas. So why don’t we see more of that in action?

JOHN MACKEY: It’s very good question. And the answer is to told in some detail in Appendix A of the book where we state the case for why conscious businesses are more successful financially than unconscious businesses, which is the exact opposite of what most people believe. See, most people think, oh, this is all very good. But if you do that, you’re going to be less competitive in business. You’re going to be less financially successful.

I mean, and Whole Foods itself, people don’t take that as a good enough example because they say, oh, yeah, well, you know, they charge too much for their products. And that’s fine for a quote, “upscale retailer,” but it wouldn’t work for most people. And yet there are so many examples in our book of price oriented companies such as Southwest Airlines, which has totally revolutionized discount air flying, or Costco or Amazon.com.

These are all very price oriented businesses that are also very highly conscious. So it’s not just an economic thing in terms of one type of business being successful when they can, in a sense, charge higher prices. It’s really just a better way to do business.

You end up having greater loyalty with your customers. You’d love lower turnover with your team members. And because they’re excited about the mission and the purpose they get from working there, they tend to be more innovative, more creative. And that creates benefits that ripple through the whole stakeholder chain. And the suppliers also tend to be more loyal because you developed partnership with them.

And so it’s this stakeholder philosophy of creating value for all your stakeholders really makes a business far more resilient, more robust. So it actually succeeds better in the marketplace. And we try to document that in the appendix.

And so in a lot of ways that appendix is one of the most important chapters in the book because it’s the exact opposite of what most people think, which is, oh, that’s very good. It just wouldn’t work for my business because I couldn’t afford to do it. We argue you can’t afford not to do it.

If you want to be competitive in the long term, your business needs to have discovered it’s higher purpose and it needs to adopt a stakeholder philosophy. And it needs to alter its leadership and culture. I think we’ve tapped into what I think is going to be the dominant paradigm in business over the next 50 years because it simply works better.

And conscious businesses tend to out compete less conscious businesses over the long term. And that’s what I believe. Our limited research shows that.

But it’s going to take probably decades before the consensus moves around to the way I just described it. And our book will be attacked even though we have that appendix in there. It’ll be attacked by some people as, oh, well, that’s great. That’s Utopian. That’s not going to work in the real world. So there’s a certain cynicism that business has to be sort of ruthless and heartless to be successful. And that’s one of the myths that we want to try to destroy.

SARAH GREEN: Well, John, I really appreciate you taking so much of your limited time and spending it with us today. Thank you.

JOHN MACKEY: Thanks, Sarah. I enjoyed the conversation with you.

SARAH GREEN: That was John Mackey, the CEO of Whole Foods Market. His new book with Raj Sisodia is Conscious Capitalism. For more, visit hbr.org.