Shareholder capitalism has increasingly come under scrutiny for its focus on maximizing shareholder returns at the expense of broader stakeholder interests. Since the 1970s, this model has driven many senior leaders to engage in cost-cutting measures and strategies aimed at boosting short-term stock prices, often at the company’s long-term detriment.
Given the dominance of shareholder capitalism, one might question whether viable alternatives exist. Can a company deliver outstanding financial returns without adhering to a shareholder-first mentality? An examination of Costco Wholesale Corporation’s performance over nearly four decades provides compelling evidence that there is indeed a better option.
The flaws of shareholder capitalism
The fundamental issue with shareholder capitalism is its short-termism. By prioritizing shareholder profits above all else, this model incentivizes leaders to make decisions that may benefit short-term stock prices but undermine long-term viability. CEOs, driven by stock-based compensation, often resort to cost-cutting and share buybacks to meet earnings expectations. These tactics, while effective in the short term, can be detrimental in the long run, underfunding critical areas such as employee development, research and development and sustainable business practices.
Cost-cutting measures often involve layoffs, reduced benefits and stagnant wages, which can demoralize the workforce and reduce productivity. Share buybacks, while reducing the number of outstanding shares and inflating earnings per share, divert resources from capital investments, research initiatives and employee training programs — areas essential for fostering innovation and maintaining competitive advantage.
This short-term focus has led to a crisis of faith in capitalism, particularly among younger workers. An October 2021 Gallup poll revealed that “socialism” was viewed positively by 47% of Americans aged 18-34, 42% of those aged 35-54, and 31% of those aged 55 and older. Only half of young adults now view capitalism favorably, down from 66% in Gallup’s 2010 survey. This shift reflects growing disillusionment with a system that appears to prioritize profits over people and long-term societal well-being.
A contrasting approach: Costco’s “do the right thing” culture
Costco stands out as a notable exception to the prevailing model of shareholder capitalism. Under the leadership of co-founder and former CEO Jim Sinegal, Costco cultivated a culture that prioritized employees, customers and sustainable growth over short-term stock market gains. This stakeholder capitalism approach has proven to be not only ethically sound but also financially successful.
Jim Sinegal once described Costco’s culture to me as “do the right thing.” When asked what that meant, he replied, “1. Obey the law, 2. Take care of our customers, 3. Take care of our employees, 4. Respect our suppliers, and 5. Reward our shareholders, pretty much in that order.” This ethos has been integral to Costco’s business model and its enduring success.
Employees who feel valued and fairly compensated are more likely to provide exceptional customer service, creating a positive feedback loop that enhances customer loyalty and satisfaction. Costco exemplifies this principle. The company pays its employees higher wages and offers better benefits compared to industry averages, resulting in lower turnover rates, higher productivity and more motivated and committed employees. At my local Costco, my wife and I have enjoyed interacting with some of the same smiling and friendly employees since the location first opened in 2002.
Costco matches its commitment to its employees with its focus on customer satisfaction. The company consistently prioritizes quality products and fair pricing over aggressive profit margins. By maintaining a low markup on its products, Costco ensures that customers receive the best value, fostering trust and loyalty. This customer-centric approach has helped Costco build a strong and devoted customer base, driving consistent revenue growth.
Costco’s remarkable financial performance reflects its long-term focus. Since its IPO in 1985, Costco’s stock has generated substantial returns for long-term shareholders. For instance, if you invested in Costco’s IPO on December 5, 1985, your annual average return would have been in excess of 18%, compared to an approximate return of 9.3% if you had invested in the S&P 500 stock index. This impressive performance underscores the value of Costco’s long-term strategy and its focus on sustainable growth.
Costco: An innovation engine
Costco’s culture not only supports ethical business practices and long-term growth but also fosters a robust environment for innovation. In some organizations, new methods and processes originate from and are dictated from the top down. By encouraging employees to contribute their ideas and recognizing their contributions on a global stage, Costco fosters a culture of innovation that enhances efficiency and drives revenue growth over the long run.
Several years ago, I was invited to Costco’s annual managers’ conference to give a keynote speech about cultures of connection. Spending the day with the group, I observed firsthand how Costco shares innovative ideas with its warehouse managers. In brief, videos presented by employees from locations worldwide, Costco showcased creative solutions and improvements devised by its workforce. This approach underscores how Costco values and leverages the ingenuity of its employees, turning the company into an innovation engine. As a regular customer, I went into the day already a fan and came out with an even greater appreciation for how Costco operates, having witnessed how employees on the frontlines have a voice, are affirmed for their contributions and are celebrated for their good ideas.
Stakeholder capitalism: A sustainable model for the future
Costco’s culture presents a compelling case for shifting away from the myopic practices of shareholder capitalism and moving towards stakeholder capitalism. By prioritizing employees, customers and long-term investments, Costco demonstrates that it is possible to achieve sustainable growth and profitability without compromising ethical principles or sacrificing stakeholder interests. Costco’s approach offers valuable lessons for other corporations seeking to navigate the complex challenges of the modern business environment.
As stakeholders demand greater accountability and transparency from corporations, the need for a more balanced approach to business becomes evident. Costco’s success underscores the importance of a corporate culture that values long-term sustainability over short-term gains. By adopting a more holistic perspective that considers the interests of employees, customers and the broader community, businesses can build a foundation for enduring success and contribute to a more equitable and sustainable economic system.
By adhering to its principle of “do the right thing” and focusing on long-term value creation, Costco has built a resilient and thriving business model that serves as a powerful antidote to the ills of shareholder capitalism.
Opinions expressed by SmartBrief contributors are their own.
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