Doing Well by Doing Good

Doing Well by Doing Good

A couple of weeks ago, I wrote about the Cult of Shareholder Value, and how many of the companies that have embraced that management methodology have wronged so many of their employees and customers while enriching their upper management and shareholders.

But not every company works that way. There are plenty of businesses that place their employees and customers first, and find that in the long run, such a strategy also benefits the management and owners. You’ll find this attitude predominant among small business owners, people who treat their employees and their communities like family, who enjoy their work and also enjoy sharing their good fortune and happiness with others.

CSR and ESG

“Corporate Social Responsibility” and “Environmental and Social Governance” are a couple of catch-phrases that have become popular recently, and they represent the thinking of a new trend in company management. This management style emphasizes sustainable business practices, by supporting a company’s ability to be both environmentally and socially conscious, and to engage all stakeholders in the company’s success.

Traditionally it has been believed that such corporate responsibility must necessarily be detrimental to earnings – any dollar expended in achieving such goals is not a dollar that could be going to the corporation’s bottom line. However, a pair of 2011 studies from the Harvard Business School and the Wharton School of Business at UPenn have destroyed that argument.

The Harvard paper examined 180 companies that the researchers divided into “high” and “low” sustainability categories over an 18-year period of time. They found that the “high” companies tend to be more long-term oriented, display better measurement and disclosure of non-financial information, and to actually outperform the “low” companies in terms of stock market performance and accounting measures.

The Wharton study involved 26 gold mines and 19 publicly-traded Canadian mining companies over a 15-year period. After compensating for all other external factors, the study’s authors concluded that the variations in the valuation of a company could be traced directly to the company’s degree of cooperation with external stakeholders. In other words, if the company kept its employees and neighbors happy, it enjoyed a degree of financial success that was many times greater than that of a company that endured chronic conflict with external stakeholders.

Costco Loves its Employees

Costco has long been held up as the hero in direct contrast with Walmart as the villain. Walmart, the nation’s biggest private employer, has been repeatedly bashed, boycotted and picketed because of its policy of low wages, part-time hours and stingy benefits.

While Costco doesn’t directly compete with the supermarket retailer, its stores do rival Walmart’s Sam’s Club chain. The company is well-known for its fair policies to both employees and customers: For years, former CEO Jim Sinegal ensured that his employees earned one of the highest wages in retail, along with a terrific benefits package. In one interview he said, “They’re entitled to buy homes and live in reasonably nice neighborhoods and send their children to school.” New CEO Craig Jelinek agrees: “I just think people need to make a living wage with health benefits. It also puts more money back into the economy and creates a healthier country. It’s really that simple.”

At a time when the national minimum wage is only $7.25, Costco pays its non-salary workers an average of nearly $21 an hour. 88% of its employees have health-care coverage, and the company pays more than 90% of the premiums.

The company also promotes from within almost exclusively, enabling even entry-level employees to move up the ladder to management positions. It cultivates employees and sends them through graduate school, as opposed to hiring MBAs from outside. Its excellent attitude to employees is evident in the incredibly low turnover rate of 5% for employees that have been with the company for over a year.

How Do They Do It?

Part of the chain’s success comes from its ability to attract a huge array of income levels among its customers, by providing low prices on everything from bulk packages of toilet paper to big screen TVs and jewelry. Luxury items abound on the discount shelves, attracting a wealthier customer than normally shops at Walmart.

The retailer is also extremely efficient with its warehouse operations; it stocks a smaller number of items and a greater quantity of those items than does a normal grocery store or big-box retailer. What this means for the customer is that you can never be quite sure whether you will find what you want on any given day; on the other hand, part of the delight of shopping at Costco is the unexpected bargains.

The company marks up its products by a maximum of 15%, and most of its products get 14% or less. 80% of its revenue actually comes from its $55-per-year membership fee, for which the company boasts an annual renewal rate of 90%. When the fee was increased from $50 in 2011, the members didn’t even blink.

Because of Costco’s massive buying ability, the company enjoys just about the lowest wholesale rates of any retailer. Its prices are even competitive with Amazon’s, which reduces the threat from that behemoth; people don’t tend to “window shop” at Costco and then later make their purchases at Amazon.

Rewards for Shareholders?

Costco’s stock price is up 23% over the past twelve months, where the S&P is up 19%. And while competitors have lost business to the internet, Costco sales are up 39% and its stock price has doubled since 2009. The stock is currently rated a Buy among most of the analysts who cover it.

Costco has plans to expand internationally, with openings in France and Spain over the next two years. Further efforts will focus on Japan, Taiwan and South Korea. One suspects that management will be equally as astute in their foreign business practices as they have proved to be at home.

The Bottom Line

“This is the lesson Costco teaches,” says Doug Stephens, founder of the consulting firm Retail Prophet and author of a forthcoming book, The Retail Revival. To paraphrase, people who work for low wages cannot be expected to be happy and gracious employees. Customers who shop where there are unhappy employees are not likely to enjoy the experience. It’s a simple concept to understand.

And Costco is not the only one: other stores known for their fair treatment of employees include Nordstrom, the Container Store, Sephora, REI, and Whole Foods Market. All have performed better than their competition in terms of share price, proving that you can indeed do well by doing good.

Karin Hernandez has been interested in personal finance since she began reading Money magazine in high school. Over the years, she has traded stocks, IPOs, options, futures and forex. She became a freelance financial writer in 2012, and currently writes stock market analysis for The Motley Fool and Seeking Alpha, as well as financial blog posts and articles for numerous private clients. She now totally believes that dividend-growth companies are the best way to invest.

One Response to “Doing Well by Doing Good”

  1. Robt says:

    Kudos to a great article and one that most analysts would not venture into. This business attitude needs to be awakened and adopted by others.

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