IR case study
Analysis of the Shareholder perspective
The Costco model of keeping employees and consumers first before shareholders has been always a controversial one. Costco model is similar to the stakeholder theory by Edward Freeman where he proposes that a corporation’s stakeholders does not constitute entirely of shareholders but also employees, the community, suppliers, consumers, etc.; anyone who is necessary to the survival of the firm1. As the CFO of Costco Richard Galanti puts it “From day one, we've run the company with the philosophy that if we pay better than average, provide a salary people can live on, have a positive environment and good benefits, we'll be able to hire better people, they'll stay longer and be more efficient. But the shareholders feel that the returns which are ploughed back for employee benefits and consumer discounts belong to them rightfully. Costco's kind-hearted philosophy toward its 100,000 cashiers, shelf-stockers and other workers has always draws criticism from the Wall Street. 2The Wall Street analysts and investors contend that Costco actually is too good to employees, with Costco shareholders suffering as a result.
Wal-Mart follows a model which believes in Milton Friedman’s “The Social Responsibility of Business is to Increase Profits”. Wal-Mart believes in profit maximization at the cost of employee welfare. The flipside to this is that the retail giant is riddled with labor issues and a high turnover rate. Sam’s Club employees spent 8% on insurance (double the national average) and average hourly wages were 10$ compared to 17$ paid by the membership based retail chain Costco3. By Friedman’s philosophy Wal-Mart indeed does a good job in maximizing returns for the shareholder. Now looking at the bigger picture Wal-Mart may be able to save some money through depriving their employees. But studies show that the employee loyalty shown by Costco’s employees more than makes up for that difference. Typical benefits for Costco’s
The Costco model of keeping employees and consumers first before shareholders has been always a controversial one. Costco model is similar to the stakeholder theory by Edward Freeman where he proposes that a corporation’s stakeholders does not constitute entirely of shareholders but also employees, the community, suppliers, consumers, etc.; anyone who is necessary to the survival of the firm1. As the CFO of Costco Richard Galanti puts it “From day one, we've run the company with the philosophy that if we pay better than average, provide a salary people can live on, have a positive environment and good benefits, we'll be able to hire better people, they'll stay longer and be more efficient. But the shareholders feel that the returns which are ploughed back for employee benefits and consumer discounts belong to them rightfully. Costco's kind-hearted philosophy toward its 100,000 cashiers, shelf-stockers and other workers has always draws criticism from the Wall Street. 2The Wall Street analysts and investors contend that Costco actually is too good to employees, with Costco shareholders suffering as a result.
Wal-Mart follows a model which believes in Milton Friedman’s “The Social Responsibility of Business is to Increase Profits”. Wal-Mart believes in profit maximization at the cost of employee welfare. The flipside to this is that the retail giant is riddled with labor issues and a high turnover rate. Sam’s Club employees spent 8% on insurance (double the national average) and average hourly wages were 10$ compared to 17$ paid by the membership based retail chain Costco3. By Friedman’s philosophy Wal-Mart indeed does a good job in maximizing returns for the shareholder. Now looking at the bigger picture Wal-Mart may be able to save some money through depriving their employees. But studies show that the employee loyalty shown by Costco’s employees more than makes up for that difference. Typical benefits for Costco’s