Stakeholder’s Theory Leads to Success


Costco is not your typical wholesale warehouse. Between its high-quality products, comparatively limited selection and uncharacteristically friendly atmosphere, Costco has developed a business strategy that keeps many people guessing. Founded in 1983 in Seattle, Washington with just one location, Costco grew over the next 29 years to be a dominant force in the wholesale warehouse market owning 608 warehouses in 5 different continents[1]. Despite being criticized about how generous they are to their employees and customers, Costco proves that a corporation that gives priority to all of their stakeholders can still be successful.

Ever since its start in 1983, Costco has been praised for its stance regarding corporate social responsibility; and these values are what make Costco the company it is today. In an interview between Rick Goosen, author of corporate social responsibility website, makegood.com/blog, and Costco CFO, Richard Galanti, Goosen asks Galanti to discuss Costco’s approach to corporate social responsibility. Galanti explains the values as they originated with the company, “The basic premise was let’s start not with how little we pay our hourly employees, and 90% of our employees are hourly, but what is a living wage?  What is affordable high quality health care?  Let’s then figure out how to make the model work with that.[2]” Considering the fact that Costco competes against numerous companies that are notorious for paying low wages and employee mistreatment, quotes like this really illustrate the overall philosophy of Costco. Costco runs their business according to the stakeholder theory; they put everyone that contributes in the operation of the company, the stakeholders, ahead of their shareholders.

A particularly unique aspect of Costco’s overall business strategy is their relationship with their employees. As touched on in the Galanti quote above, Costco makes it a point to pay their employees well. Costco’s average salary is $17 an hour compared to their competitor Wal-Mart, who pays an average salary of $10.11[3]. Costco’s generosity continues with their health insurance programs. Compared to the industry average of 23% of employees having insurance coverage, Costco covers 85% of their employees[4].

Costco’s upright treatment of their employees doesn’t stop at their impressive salary and insurance statistics. They strive to promote a very tight-knit community. In order to help this community form, they set certain parameters regarding promotion. In the article, Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club, Wayne Cascio describes these parameters, “The company also requires itself to promote internally for 86 percent of its openings in top positions. “In truth, it turns out to be 98 percent” according to Mr. Sinegal” Having between 86 and 98 percent of the company’s top position hires be from existing Costco employees proves not only Costco’s interest in their employees, but it also shows the satisfaction of Costco’s employees.

When analyzing the ethical nature of a company, it is often necessary to discuss what philosophers and ethical thinkers would have to say about a company’s operation. Despite how much Costco is criticized, Immanuel Kant would likely praise their strategies. In his third formulation of the categorical imperative, Kant explains the business firm as a moral community. In his paper, A Kantian Approach to Business Ethics*, Norman Bowie explains Kant’s third formulation. He explains, “Organizations are composed of persons and, given the nature of persons, organizational structures must treat the humanity in persons with dignity and respect[5]” Instead of looking at a company as an organization that exists to exclusively generate profits, Kant looks at companies as a group of human beings. I believe that he would praise the Costco’s effort in treating their employees with impressive salaries and benefits: especially when their financial statistics are stacked up against their competitors.

Costco’s interest in treating all stakeholders with respect continues with their customer relationships. Before getting into Costco’s treatment of customers, it is important to look at their unique customer structure. Costco offers a number of different membership options, which have special benefits depending on the type of customer. Between 2010 and 2012, the number of members of Costco increased from 58,000,000 to 64,000,000 to 67,000,000, respectively[6].  As of 2005, despite charging their members $45 a year in membership fees, they were able to achieve a renewal rate of 86%[7]. This strong renewal rate shows how loyal Costco’s customers are.

With their nature of strong ethics, and great stakeholder relations comes a lot of criticism for Costco. Many analysts on Wall Street believe that they are foolish to treat their employees and customers so well because it takes away from their bottom line. Bill Dreher of Deutsche Bank Securities went as far to say, “At Costco, it’s better to be an employee or a customer than a shareholder.” Ian Gordon of Sanford C. Bernstein & Co. feels similarly and says, “Whatever goes to employees comes out of the pockets of shareholders[8].”

American economist, Milton Friedman, would likely agree with these Wall Street analysts. In his doctrine, The Social Responsibility of Business is to Increase Profits, he says, “That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society[9].” Friedman would laugh at the fact that Costco has a strict rule of putting 15% cap on its profit margin per item (14% for most items). He would likely ask why they don’t operate more like Wal-Mart and cut wages and overwork employees.

CEO, Jim Sinegal, doesn’t care what criticism he receives. In response to Wall Street analyst criticism, Sinegal says, “On Wall Street they’re in the business of making money between now and next Thursday. I don’t say that with any bitterness, but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now[10].” Sinegal makes it evident that he has different motives than most, but he has a plan, and he’s going to stick with it. Between the impressive sales, net income, membership, and number of warehouses statistics (See Figure 1), Costco has proven that their plan works.

Many people will look at these numbers and wonder how Costco does it. They wonder how they can produce such impressive numbers while paying their employees so well, and charging such low prices on their products. Costco is rewarded with their sound ethical behavior.

To illustrate this point, let’s look at some comparisons between Costco and Wal-Mart’s wholesale club, Sam’s Club. As of 2005, Costco had an employee turnover rate of 17% compared to Sam’s Club’s rate of 44%. Because Sam’s Club has significantly more employees than Costco, we’ll replace Costco’s turn over rate with Sam’s Club’s. If Costco’s employee turnover rate was 44%, like Sam’s Club, they would incur an annual cost of $631.05 million, compared to their existing cost of $243.81 million. Another aspect of the company where Costco is able to save money is through their remarkably low inventory shrinkage. Cascio explains, “A 2002 study by Ernst & Young of 55 of the largest and most successful American retailers operating an average of 1,076 stores with mean revenues of approximately $8.8 billion, revealed that the average loss was 1.7 percent of sales, or roughly $19 million annually (Ernst & Young, 2003)…Costco’s inventory shrinkage is the lowest in the industry, well below 0.20 percent of sales for fiscal 2005[11]” This large discrepancy shows how much Costco’s customers care about their company and how much Costco is able to save compared to competitors. Towards the end of his paper, Cascio says, “In return for all of its generosity, Costco gets one of the most loyal and productive workforces in all of retailing. While Sam’s Club’s 110,200 employees generated some $37.1 billion in U. S. sales in 2005, Costco did $43.05 billion in U. S. sales with 38 percent fewer employees[12].” The fact that with 38 percent fewer employees, Costco is able to generate 16 percent more revenue is truly a testament to the quality and dedication of Costco employees. These numbers prove that Costco is rewarded by their employees for paying them significantly higher than the industry average.

In addition to Kant, Edward Freeman would likely praise Costco for their business strategies. In his book, Managing for Stakeholders Survival, Reputation, Success, he admits that shareholders are important stakeholders, but that they are the not the only kind. He considers customers, employees, suppliers, communities and financiers primary or definitional stakeholders, who are vital for a firm’s continued growth and survival[13]. Considering their concentration on the treatment of employees and customers and their subsequent growth and impressive financial standing, Costco is a model corporation for Freeman’s philosophy.

Costco has developed a business strategy that is criticized by many, but has proven to be successful. Their policy of concentrating on all stakeholders may look costly at the surface, but it has proven to be beneficial in the long run. They could easily conform to the culture of many companies in their industry by paying low wages, treating employees with little respect and do anything else to cut costs, but they started their company with the intention of treating every stakeholder with respect, and considering their success, they have no reason to change now.

Work Cited Page

  1. Costco Wholesale Corporation. (2012). 10-K Annual Report 2012. Retrieved November 16, 2012, from Edgar Online.
  1. Goosen, Rick. “MakeGood Helps Your Company Communicate All the Good Things That You Do.” MakeGood Blog RSS. N.p., 4 June 2010. Web. 19 Nov. 2012. <http://www.makegood.com/blog/2010/06/04/costco-social-responsibility-part-i-exclusive-interview-with-richard-galanti-cfo/&gt;.
  1. Cascio, Wayne F. “Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club.” Academy of Management Perspectives (2006)
  1. Frederick, Robert, ed. A companion to business ethics. Vol. 17. Wiley-Blackwell, 2008.
  1. Friedman, Milton. “The Social Responsibility of Business Is to Increase Profits.”
  1. Freeman, R. Edward, Jeffrey S. Harrison, and Andrew C. Wicks. Managing for Stakeholders: Survival, Reputation, and Success. New Haven: Yale UP, 2007. Print.

[1]Costco Wholesale Corporation. (2012). 10-K Annual Report 2012. Retrieved November 16, 2012, from Edgar Online.

[2] Goosen, Rick. “MakeGood Helps Your Company Communicate All the Good Things That You Do.” MakeGood Blog RSS. N.p., 4 June 2010. Web. 19 Nov. 2012. <http://www.makegood.com/blog/2010/06/04/costco-social-responsibility-part-i-exclusive-interview-with-richard-galanti-cfo/&gt;.

[3] Cascio, Wayne F. “Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club.” Academy of Management Perspectives (2006)

[4] IBID

[5] Frederick, Robert, ed. A companion to business ethics. Vol. 17. Wiley-Blackwell, 2008.

[6] 10-K Annual Report 2012

[7] Cascio, Wayne F

[8] Cascio, Wayne F

[9] Friedman, Milton. “The Social Responsibility of Business Is to Increase Profits.”

[10] Cascio, Wayne F

[11] Cascio, Wayne F

[12] IBID

[13] Freeman, R. Edward, Jeffrey S. Harrison, and Andrew C. Wicks. Managing for Stakeholders: Survival, Reputation, and Success. New Haven: Yale UP, 2007. Print.

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