I commend an article on LewRockwell.com by Karen De Coster regarding the notion of “corporate purposes.” She – a CPA from Detroit – deconstructs John Mackey's, CEO of Whole Foods, view of managing for “stakeholders” as a mistake. (I’ve previously blogged here on TFL on the subject of this debate between Mackey and Milton Friedman, Nobel-Prize-winning economist in the pages of Reason magazine.)
I get the sense that a lot of free marketeers are misunderstanding Mackey’s point, so I offer this follow up. Mackey was sharing the secret of his success, which all agree has been quite phenomenal. He’s created a whole new category of retailing: whole, organic, health foods. Sure, that category has been around for years, but Mackey and Whole Foods have changed it from a mom-and-pop, independent to a national chain. No small task. And he’s done so quite profitably and with an excellent stock market performance.
All Mackey is really doing, it seems to me, is to recognize the concepts of non-quantifiable costs and benefits, what economists call “psychic costs and benefits.” It could be as simple as choosing between two restaurants that offer the same meal. Restaurant A has nasty wait staff, is loud and noisy, and has dirty washrooms. Restaurant B has pleasant wait staff, has a terrific ambience, and is spotless. I for one would prefer B to A. I predict that over time more customers would, too, and so B is more likely to be profitable over A.
If we found that B spends a lot of time with the staff, training them, coaching them, encouraging them, etc., we might find that in the very short run, that’s unprofitable, for there are quantifiable costs associated with such staff development. Restaurant A does none of this, and regularly verbally abuses the staff, randomly firing people the management doesn’t like. Employee turnover is high at A, as those who are not fired quit in disgust over the abusive, psychic costs the management lays on them.
The nasty A restaurant continually abuses their suppliers, haranguing them for penny savings and insulting them each time they bring their wares through the loading dock. Restaurant B greets the vendor with a smile. Sure, B’s price sensitive, but they might also want a constant flow of quality products at “fair” prices, even if it’s not the absolute best price each and every time. B’s management is smart, and they know that consistency of quality product is far more profitable, for there are costs with constantly negotiating over each and every transaction. Some vendors will simply refuse to do business with restaurant A, as the psychic costs are just too high.
Notice that Mackey says “There is, of course, no magical formula to calculate how much value each stakeholder should receive from the company. It is a dynamic process that evolves with the competitive marketplace.” Nor does he say that others must adopt the “stakeholder” model, or, worse, that government should enforce “common courtesy and respect” in Corporate America. It strikes me that he’s simply saying that it’s quite profitable to pay attention to the elements that lead to a healthy, sustainable business.
If you’re in it for the quick buck, this feels like a scolding of sorts, and perhaps it is. But haven’t we seen enough of what the quick-buck artists like Bernie Ebbers, Dennis Koslowski, Sam Waksal, Al Dunlop, etc., have a tendency to do? In an almost monomaniacal way, they abuse everyone around them, and, perhaps paradoxically, they destroy shareholder value. And what’s Koslowski going to do with the $5000 shower curtain in prison?
-Robert Capozzi