James O’Toole’s brainy and provocative new book, The Enlightened Capitalists, examines the challenges of being a socially responsible business that tries to do well by doing good.
O’Toole, professor emeritus at USC’s Marshall School of Business, identifies 50 American and British business leaders of the last two centuries whose organizational skills and ethics benefited both society and shareholders, and he profiles about 25 of them in depth.
Motivated by religious beliefs or social consciousness, early business pioneers greatly improved the lives of their employees and communities by resolving problems such as poverty, unsafe and unhealthy working conditions, inferior goods and environmental degradation.
Modern-day enlightened capitalists have provided environmentally sound goods or services, offered employees ownership stakes in companies, continuing education and scholarships, upgraded medical coverage, child-care facilities, and, by relocating their offices and workplaces to failing towns, have rehabilitated these areas.
“Significantly, the enlightened capitalists sought to address social problems primarily through their business practices, rather than by acts of charity or philanthropy,’’ O’Toole wrote.
The bad news, he said, is that most companies that are engaged in “virtuous practices’’ do not endure in their original “virtuous’’ form. His research, undertaken over about 50 years, shows that after an enlightened capitalist founder is gone, only a handful of companies have survived intact even two successions in leadership.
From the 18th century to the present, O’Toole said, the same question nags: “Are socially virtuous business practices compatible with shareholder capitalism?” He answers this question in the last line of his book on what he describes as “an uncertain’’ note.
Before that ambiguous finale, O’Toole presents examples of virtue succeeding in business, but far more cases of failure.
Loss of control after going public and being answerable to a board and profit-driven shareholders is the most frequent culprit. Also, mergers or acquisitions have diluted founders’ original intent, usually denuding the company of its socially enlightened values.
Among the 24 companies that O’Toole profiled in his 1985 book, Vanguard Management, only three—Dayton-Hudson (now Target), W. L. Gore and Lincoln Electric have been able to maintain their founders’ visions of operating a socially responsible business that does well because it does good.
Among those profiled in Enlightened Capitalists is Robert Owen (1771-1858), referred to as the first business reformer. Owen turned the unprofitable New Lanark, Scotland textile mills into a thriving business where he ended child labor, placed preteens in a school he had built, cleaned up and properly heated and ventilated the mills, reduced work hours, provided a communal kitchen, established retirement homes for aged workers, offered medical care, built parks and beautified the community. Although it eventually foundered due to Owen’s eccentric nature and poor management, still-standing mills and other New Lanark buildings are a UNESCO World Heritage site visited by thousands of tourists yearly.
A continuing success story is Lincoln Electric Company, a $3 billion in revenues multinational electric arc-welding company, with 3,300 workers in the United States that has not laid off a single permanent employee since 1947, and for more than 80 years has paid bonuses to its workers averaging from 40 percent to 100 percent of their annual salaries.
Inventor and engineer James Lincoln (1883-1965) founded the company in 1904 in Cleveland on the theory made famous by Horace Mann that “property and labor in different classes are essentially antagonistic; but property and labor in the same class are essentially fraternal.’’ Four rules devised by Lincoln still apply at the company: communication and participation, piecework compensation, merit-based bonuses, and guaranteed employment.
Beyond the usual benefits, Lincoln offers stock ownership, profit sharing and pensions, plus employment in an egalitarian setting where there are no executive parking spaces or dining facilities and everybody uses the same entrance.
Even companies that have suffered a loss of social engagement have made valuable contributions, such as Herman Miller, a leader in office furniture, which early adopted the Scanlon Plan, “a form of gainsharing in which employees are financially rewarded for their efforts and ideas to improve productivity and product quality.’’
And Levi Strauss led the way in the apparel industry of hiring and promoting women, training the handicapped and retraining workers when automated equipment was introduced.
O’Toole discussed contemporary movements such as Conscious Capitalism, which encourages executives to adopt enlightened employment, as well as alternative workplaces such as cooperatives, which have about 250 million workers worldwide.
Financial advisors can play an important role in informing clients about what companies are socially engaged. O’Toole acknowledges that a growing number of consumers and investors, especially young ones, want to do business with those who do good.
The Enlightened Capitalists: Cautionary Tales of Business Pioneers Who Tried to Do Well by Doing Good. James O’Toole. Harper Collins. $35. 592 pages.
Eleanor O’Sullivan is an award-winning journalist who writes for Financial Advisor.