Published: Mar 14, 2007 in Knowledge@Emory
We are seeing the end of business as usual, asserts Jagdish Sheth, a professor of marketing and corporate strategy at Emory University’s Goizueta Business School. Some innovative companies are expanding the goals of traditional corporations. Concerned about more than just profits, these organizations are striving to meet the needs of all their stakeholders: employees, suppliers and neighbors, as well as investors.
In an upcoming book, Sheth and his co-authors (Raj Sisodia and David Wolfe) call these companies Firms of Endearment (FoEs). People who work with, buy from, invest in, or live near these companies “feel safe, secure, and pleased in their dealings” because these companies do not put the interests of one stakeholder group ahead of others’.
Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (Wharton School Publishing, 2007) describes the operations of 30 such companies. To choose them, Sheth–along with co-authors, Rajendra Sisodia of Bentley College and customer-behavior expert David Wolfe–asked thousands of people for the names of companies that they don’t “just like but love.”Then, they judged how well these companies have met the needs of their various stakeholders by asking such questions as: Are their customers intensely loyal? Do these companies take advantage of their part-time employees? Do they squeeze their suppliers? Are their standards of conduct high worldwide? How have they acted during industry downturns?
Only after choosing the FoE finalists, did the authors examine their financial records. What they found surprised them. Over the ten years that ended in June 2006, the public FoEs returned 1,184% to their investors, compared to the 122% earned by the S&P 500. “Apparently,” Sheth declares, “not only can you have your cake and eat it too; you can also give some to your friends, donate some to a soup kitchen, and help support the local cooking school.”
How did these FoEs earn great returns while being thoughtful and generous? Sheth looked closely at their stakeholder relations for clues.
He observed that FoEs tend to have lower employee-turnover costs and particularly effective workers, probably because many of them offer good wages and benefits and because most celebrate their employees’ achievements. In addition, the majority of FoE executives know their companies well because they have come up through the ranks. Many also try to earn their employees’ trust by making their companies transparent, building teams and giving workers the resources and authority necessary to fix problems.
Similarly, FoEs earn their customers’ loyalty by treating them well. For example, New Balance offers shoes in more widths than do other sneaker makers because it wants to provide all its customers well-fitting shoes. At Whole Foods and Wegmans, customers know they’ll receive knowledgeable service because these companies strive to hire employees who love and understand food. Outfitter LL Bean guarantees its products forever–even those bought decades ago.
According to Sheth, “most companies that are highly profitable are not focused primarily on profit making.” Instead, they look to the long-term and invest heavily in R&D. He says that the market actually rewards this kind of forward thinking, setting share prices according to its expectations for a company’s performance at least 3 years hence. Sheth says that his FoE’s ROE ratios show that these companies return more profit per shareholder dollar than do companies in the S&P 500, and the higher P/E ratios of his FoEs confirm the market’s confidence in their future growth.
Unlike companies that operate according to a traditional business model, FoEs actively seek to cooperate with others. By working with its suppliers instead of trying to squeeze them, FoE Honda ensures reliable sources of high-quality parts. It has also received suggestions that helped it reduce the cost of manufacturing its Accord by 21.3%. By working with its union, Harley-Davidson rose from near death in the early ‘80s to enjoy a 54% market share in the US today. Through its C.A.F.E. practices, Starbucks rewards producers of high-quality, sustainably grown coffee beans and has earned a reputation for fair trading and a concern for the environment.
Sheth suggests that this kind of cooperation shows that Western capitalism is evolving into a more compassionate economic system. And why not? Cooperation can be more effective than competition because two heads are often better than one. But just as important, some companies are learning that by working with and not at the expense of stakeholders, they can avoid the kind of bad press that has dodged other large corporations. These organizations don’t want to see ex-employees reviling them on television; they don’t want to read the angry accusations of community activists on the Internet.
Some brave organizations are even cooperating with their competitors, the book contends, because they realize that business need not be a zero-sum game. Instead, the business landscape can embrace expanding possibilities in which a company like Samsung becomes an important supplier of memory chips and LCD panels to rivals Sony and Apple. More and more companies will see the wisdom of this expansive understanding of business possibilities, Sheth argues, and create similar opportunities.
He says that FoEs point the way of the future, in part, because they are adaptive, able to configure themselves as necessary to meet new challenges. Many of them have abandoned traditional organizational hierarchies in favor of “complex adaptive systems–self-organizing networks of entities that continuously form and reform in response to evolving needs and environmental changes.” They have rejected the “command and control” management style in favor of one that is “more catalytic and inspirational.”
This form of management can bring out the best in employees, encouraging their mutual respect and loyalty and building a culture of service, enthusiasm and even playfulness. At IDEO, for example, “no one is afraid to speak up against management.” In this non-hierarchical organization, “employees are able to relax and come up with ideas without fear of expressing their thoughts openly.”
Capitalism is changing, maintains Sheth. Long ago, people stopped declaring that what’s good for GM is good for the country, and started wondering whether GM is good for the country. Now, they ask the same about Wal-Mart and a host of other corporations with lack-luster profits and poor stakeholder relations.
Such companies would do well to follow the FoE example, Sheth maintains, paying attention to its stakeholders as a way to improve their bottom line.