Capitalists Arise!: End Economic Inequality, Grow the Middle Class, Heal the Nation (Excerpt)

Jim Sinegal is the son of a coal miner and steelworker. He grew up with a firsthand view of the realities of human labor and the difficulties of making a living through decades of sustained hard work, in his father’s life and then in his own. What has endeared him to me the most may be that he’s also a CEO who, at one point, has told unhappy shareholder activists to take a flying leap. He’s the founder of Costco, one of the most successful retailers in the world, in an industry that’s as tough as it gets. Few companies anywhere operate in an industry with lower margins. Costco is a public company, so it has no choice but to deliver top performance for shareholders. And yet, Sinegal founded the company with four simple, key principles:

1. Obey the law.
2. Treat customers fairly.
3. Treat employees fairly.
4. Respect suppliers.

You don’t need an MBA to understand those basics. They equalize a CEO’s devotion to the entire spectrum of stakeholders — not simply shareholders. If the company devotes itself to its employees, its customers, its suppliers, and the laws of its community, a profit will follow. Shareholders aren’t even on the list, and yet they are a happy bunch. He has always adhered to those four cardinal rules, and he’s been able to do it because he executed his strategy with superhuman organizational efficiencies. As a result, since 1983, he has grown Costco into a $116 billion giant.

I wanted to hear from him personally about how difficult this has been. He began the conversation by quoting from an old article about Costco that contained a line probably meant as criticism, but which has become a badge of honor he proudly repeats — even though it isn’t entirely accurate. What’s true is the spirit of the statement: put customers and employees first, and shareholders will reap rewards naturally. In Jim’s words: “We had someone who wrote a major piece on us with a phrase that caught on. What he concluded was, it was better to be a Costco employee and a Costco customer than to be a Costco shareholder. In the early days, we had critics who would come in here, look at what we were doing, and say, ‘You’re charging $74.99 for that bottle of wine? You could easily get $90 for it.’ They had the same reaction to our wages and health care.”

In other words, people thought he was a little crazy. When he founded the company, it was a struggle simply getting a license to run his original warehouse club in the state of Washington. Nothing made sense to the state officials who peppered him with queries about how he was going to make it work. They all suspected he would be cutting corners, cheating somebody somewhere — because they couldn’t see how you could charge a customer to shop in a warehouse. Who would pay a store to shop there? Why would people flock to a place with a smaller than usual selection of products, many of them stacked to the ceiling, while forklifts shuttled inventory around through the aisles at all hours? It sounded bizarre: something had to be amiss.

So Jim and his team realized they needed to become a model of virtue — to prove they were on the level with their business model. They vowed to be impeccable and unimpeachable: “We sat down and decided we were going to overcome any objection anyone would have to shopping with us. We would offer a full customer- satisfaction warranty for the membership as a whole. We would have the best refund policy, not only for the products, but also for the membership fee. If people were unhappy at any point in time, we gave them back their fee. We’d have no superlatives in advertising. Put the stuff out there and let the customer make the choice. Never carry a second or irregular. No one would be able to say we were making money off the backs of our employees, because we’d have the best wages and best benefit plan. It was all part of establishing our four fundamental principles, our code of ethics.”

As a result, membership grew and has never stopped growing, as have sales, and shareholders have seen even more amazing returns than anyone might have expected. “Our sales have compounded since 1985 at about 13 percent per year. Our earnings are pretty much the same: 13.2 [percent]. Our stock has grown at 16.1 percent.”

It wasn’t always easy. Some quarters and some years were rough, and the activists would pounce. But Sinegal and his team held fast to their core principles by stressing that they were in the business for the long term, not for quarterly results.

“I remember sitting down with a top executive from P&G fifteen, twenty years ago, and we were having a glass of wine, and he took a cocktail napkin and started calling some numbers, comparing SG&A [selling, general, and administrative costs] for various companies. He says, you look at Walmart, which has an SG&A of 15 percent, and Target has an SG&A of 21 percent, and Kmart has a 24 or 25, and Sears has a 32 percent SG&A . . . You don’t have to be a Rhodes scholar to know who is going to win this game.”

I asked, “What was yours over the years?” “Less than ten. Fractionally under ten.”

In those six words you have the fulcrum of his success. He gave himself the freedom to be good to his employees, his customers, and his suppliers because his business had performed at an Olympic level in terms of day-to-day and month-to-month operations. Costco keeps finding every last way to cut waste and lower costs to a level unheard of in its industry — without cutting wages or laying people off. Rigorous, systematic efficiencies from top to bottom give Costco the freedom to treat their employees as human beings, not simply as resources or costs.

Reprinted by permission of Berrett-Koehler Publishers. Excerpted from Capitalists Arise!: End Economic Inequality, Grow the Middle Class, Heal the Nation. Copyright 2017 by Peter Georgescu and David Dorsey. All rights reserved.

About the Author

Peter Georgescu is chairman emeritus of Young & Rubicam, which has more than 300 offices around the globe; vice chairman of New York Presbyterian Hospital; a member of the Council on Foreign Relations; and a graduate of Princeton and Stanford. Georgescu has been a director of 7 public companies including IFF, Toys R Us, and Levi Strauss. He contributes regularly to Forbes and is the author of the new book,Capitalists Arise!.