Who are the Conscious Companies?

In a previous post, we discussed the multi-stakeholder operating system (MsOS), and its comprehensive approach to analyzing how a company treats each of its key stakeholders. The theory behind the MsOS is that companies that seek positive outcomes for each of their key stakeholders (customers, employees, communities, suppliers, and investors) are not only considered ‘good corporate citizens’ by many measures, but also take a much longer term, more holistic approach to managing their business.

In the analysis below, we consider some real-life examples of companies that have taken clear actions to promote a positive outcome for one of their key stakeholders, even if that decision may have been at odds with a more traditional approach to managing a business for short term results.

Caring about Employees: Costco Wholesale Corporation

To some companies, employees are an expense that should be minimized through driving down wages and benefits or preventing the formulation of unions. But for companies that adhere to a multi-stakeholder operating system, employees are a key long term asset that can drive innovation or improve the customer experience. One firm that believes in this approach Costco. The warehouse retailer has become well known for its above-average pay, offering a minimum wage of $13.50 per hour, 35% higher than Walmart’s starting minimum wage.1 Some have critiqued Costco for this practice, such as Deutsche Bank analyst Bill Dreher, who once complained that “at Costco, it’s better to be an employee or a customer than a shareholder.”2 Yet Costco believes firmly in prioritizing employee retention. CEO James Senegal went on the record saying that “paying your employees well is not only the right thing to do, but it makes for good business.”3 Studies have shown that the higher wages at Costco have positive financial implications, including lower employee turnover, less employee theft, and higher operating profit per hourly employee than other industry competitors.4

Putting the Customer First: CVS Health

“The customer is always right” may be a business adage as old as capitalism, but how many companies are willing to say “no” to customer demand because they believe it is the right thing to do for their long term relationship with customers? In 2014, CVS Health, the US’s second largest drugstore, announced that it would ban sales of cigarettes and tobacco products, a move that would eliminate $2 billion in annual revenue. Why did they take an action that seems at odds with maximizing profits? The company believed that selling these products “conflicted with [their] purpose of helping people on their path to better health.”5 CVS shoppers routinely trust their pharmacists, nurse practitioners, and staff to serve their health care needs, and selling tobacco products clearly conflicted with this relationship. In other words, to build more customer loyalty, CVS needed to practice what it preached. While the short term impact of this ban dented CVS’s earnings, the impact of the ban is already creating a better outcome for customers. CVS believes the tobacco ban has meaningfully reduced cigarette sales in states where CVS has a strong presence and increased efforts by customers to quit smoking via higher sales of nicotine patches.6

Maintaining Strong Supplier Relationships: Nike

A firm’s relationship with its suppliers can often be contentious, with ever increasing demands for price cuts, quality improvements, and faster delivery. But according to experts, an adversarial relationship with suppliers is at odds with best practices. Instead, firms should build “close-knit networks of vendors that continuously learn, improve, and prosper along with their parent companies.”7 Nike is one firm that has adopted this model. In the 1990’s, Nike was publicly chastised, even boycotted, for supporting poor supply chain practices in an effort to reduce costs above all else. Nike’s transgressions included hiring suppliers that employed child labor and paid workers below local minimum wage laws. Due to intense public pressure, Nike unveiled a dramatically new approach to supply chain management dubbed “responsible competitiveness”, which “aims to focus on the root causes of labor exploitation and to bring about systemic change to prevent such abuses.”8 Inherent in this approach was an acceptance that “building long-term relationships with suppliers is a key component of effecting systemic change,” representing “a reversal of the company’s historical practice of pursuing low prices on an item by item basis.” As a result of this new philosophy, Nike not only has become an advocate for improving labor conditions, but has also moved to healthier, long term supplier relationships.

Connecting with Communities: Whole Foods Market

Businesses can choose to perceive local communities either negatively, as sources of regulations, taxes, and inimical neighbors, or positively, as an important source of employees, customers, and partners. Those firms that chose the positive angle often work to develop much deeper bonds with their local communities. Whole Foods Market prides itself of maintaining meaningful relationships with the communities in which it operates. The company holds ‘5% days’ in which a store will donate 5% of net sales to a local charity, offers loans to local suppliers, and promotes high environmental standards across its stores.9 What’s the value of a close relationship with local communities? Whole Foods might not exist without prioritizing community relationships. In 1981, a flood at its first store wiped out $400,000 in inventory and equipment, but “customers and neighbors voluntarily joined the staff to repair and clean up the damage” because the success of the store meant so much to them.10

 

As of 4/4/2017, Costco Wholesale Corp was 0.76% of KRMA, Nike Inc. 0.77%, Whole Foods Market Inc. 0.72%, and CVS Health Corp 0.70%.  Click here for current holdings of KRMA.  Holdings are subject to change. There is no guarantee companies mentioned remain in or out of the Global X Conscious Companies ETF.