IT S NOT SHARE OF WALLET ANYMORE; IT SHARE OF HEART · Firms of Endearment had its origins in...

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ITS NOT SHARE OF W ALLET ANYMORE; ITS SHARE OF HEART This book is not about corporate social responsibility. It is about sound business management. It is a book that owes much to the ideas of R. Edward Freeman, who in 1984 made a strong case for a stakeholder-oriented business model in his book Strategic Management: A Stakeholder Approach (Pittman Publishing). As management professor Ronald W. Clement wrote in an article examining stakeholder management theory, “Free- man was the first management writer to so clearly identify the strate- gic importance of groups and individuals beyond not only the firm’s stockholders, but also its employees, customers, and suppliers. Indeed, he saw such widely disparate groups as local community organizations, environmentalists, consumer advocates, governments, special interest groups, and even competitors and the media as legiti- mate stakeholders.” 1 Firms of Endearment had its origins in discussions among the authors about writing a book on the topic of how marketing has lost its way, consuming ever-more resources but delivering less in terms of customer satisfaction and loyalty. One title tossed out was 1 1

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Page 1: IT S NOT SHARE OF WALLET ANYMORE; IT SHARE OF HEART · Firms of Endearment had its origins in discussions among the authors about writing a book on the topic of how marketing has

IT’S NOT SHARE OF

WALLET ANYMORE; IT’SSHARE OF HEART

This book is not about corporate social responsibility. It isabout sound business management.

It is a book that owes much to the ideas of R. Edward Freeman,who in 1984 made a strong case for a stakeholder-oriented businessmodel in his book Strategic Management: A Stakeholder Approach(Pittman Publishing). As management professor Ronald W. Clementwrote in an article examining stakeholder management theory, “Free-man was the first management writer to so clearly identify the strate-gic importance of groups and individuals beyond not only the firm’sstockholders, but also its employees, customers, and suppliers.Indeed, he saw such widely disparate groups as local communityorganizations, environmentalists, consumer advocates, governments,special interest groups, and even competitors and the media as legiti-mate stakeholders.”1

Firms of Endearment had its origins in discussions among theauthors about writing a book on the topic of how marketing has lostits way, consuming ever-more resources but delivering less in termsof customer satisfaction and loyalty. One title tossed out was

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In Search of Marketing Excellence. However, as we continued explor-ing the topic and identifying companies that spent less but achievedmore with marketing, we found increasing support for the moreholistic perspective that customers are best served by companies thatenjoy good relationships with all their stakeholders—employees, sup-pliers, the communities in which they operate, and of course, theirstockholders. This line of thinking led us to the work of Prof.Freeman, who, among other distinctions, heads the Center forApplied Ethics at the University of Virginia’s Darden School of Business.

Since the publication of Freeman’s seminal book on stakeholder-biased business models, a flood of articles and books have examinedthe issue and argued for or against the stakeholder approach to busi-ness management. Our driving mission in this book is to present evi-dence that supports Freeman’s ideas about stakeholders in a way thatinspires business leaders to turn their companies toward a stake-holder relationship business model, as Timberland CEO JeffreySwartz did after experiencing a life-changing event. We say moreabout that later.

In Firms of Endearment, we issue a clarion call for companies—indeed, organizations of every stripe—to reorganize and becomevehicles of service to every stakeholder group. We offer a substantialvolume of case-based evidence that companies that hew to a stake-holder relationship management (SRM) business model develop asignificant and lasting competitive advantage over their counterpartswho subscribe to the more traditional shareholder perspective.Intriguingly, the companies we examine have rewarded shareholderswell above the norm.

What we learned in the research behind this book emboldens usto predict that SRM business models will increasingly be seen as themost efficacious way to achieve sustained superior business perform-ance in years to come.

To understand that prediction, one must reflect on the profoundchanges taking place in the cultural bedrock of U.S. society as well asin every other developed nation. The aging of developed societies is amajor factor in these changes. With the majority of adults now 40 andolder, the worldviews, values, and needs of the young no longer have

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the influence on society they once had. Instead, the worldviews andvalues that developmental psychologists have generally associate withmidlife and beyond have become more influential on culture thanever. Recent surveys by consumer trend watchers such as theYankelovich Monitor bear this out. Myra Stark of the global ad agencySaatchi & Saatchi, in an essay titled “The State of the U.S. Consumer2002,” wrote the following:

It’s as though the consumer is asking, “What really matters?What do I really care about?” That’s what’s behind “repriori-tization” and “resurgent patriotism,” and the “reaffirmationof family, home and community,” as well as the need for balance in work and home lives. In the face of threats to oursafety, our way of life and our economic stability, Americanshave pulled back from many of the things that seemed to mat-ter in the ‘90s —materialism, career, the celebrity culture, theaffluent attitude — and are rethinking how they want to liveand work. Daniel Pink, author of Free Agent Nation, callsthis new seriousness “the flight to meaning.” “In turbulenttimes,” he says, “people get serious about finding meaning”2

The meaning of life—and the meaning of one’s own life in partic-ular—is a perennial issue in midlife and beyond, but its influence onsociety was far less when the young were the majority. However withthe adult majority now consisting of people over the age of 40, thesearch for meaning has a major influence on the ethos of society atlarge. We see this playing a big role in reshaping corporate culture as well.

It is common for people nearing or just beyond the career-building and family-raising years to ask, “What am I going to do withthe rest of my life?” This self-query arises from a sense that oneshould be doing more than serving just one’s self; one should beginthinking about “giving back.”

We discovered many business leaders who have asked themselvesa similar question: “How are we going to make this company aninstrument of service to society even as we fulfill our obligation tobuild shareholder wealth?”

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As we discussed in the prologue, we have entered a new era, theAge of Transcendence. This term signifies a fact supported by numer-ous consumer surveys showing that people are increasingly lookingfor higher meaning in their lives, rather than simply looking to add tothe store of things they own. This is a signature trait of people inmidlife and beyond who are not battling basic survival issues, eithermaterially or emotionally. The search for meaning is changing expec-tations in the marketplace, and in the workplace. Indeed, we believeit is changing the very soul of capitalism.

Many have long regarded capitalism as an economic conceptwithout a soul; it is all about business and markets. Humanistics hasno role in business. However, as we see it, the edifice of capitalism isundergoing its furthest-reaching transformation since Adam Smithpublished Wealth of Nations in 1776. The nature of the transforma-tion can be summed up in one short statement: Companies areincreasingly being held accountable for their humanistic as well aseconomic performance. Many institutional investors are playing amajor role in this. With their own constituencies increasinglydemanding accountability and social responsibility in their invest-ments, many institutional investors are pressing companies in whichthey invest to account for their corporate social responsibility.

What we call a humanistic company is run in such a way that itsstakeholders—customers, employees, suppliers, business partners,society, and many investors—develop an emotional connection withit, an affectionate regard not unlike the way many people feel abouttheir favorite sports teams. Humanistic companies—or firms ofendearment (FoEs)—seek to maximize their value to society as awhole, not just to their shareholders. They are the ultimate value cre-ators: They create emotional value, experiential value, social value,and of course, financial value. People who interact with such compa-nies feel safe, secure, and pleased in their dealings. They enjoy work-ing with or for the company, buying from it, investing in it, and havingit as a neighbor.

Numerous companies are successful and admirable in many waysbut lack a strong emotive dimension. We argue that for the bestprospects of success in the future, companies will need to combine anemotive dimension with operational efficacy. Some have called the

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emotive dimension the “soul of a company.” Companies without soulface a doubtful future.

In recent years, Wal-Mart has become a lesson in what we aretalking about. Many have come to view it as a company without a soul.According to a March 2004 article published by The Hartman Group,a market research firm in Bellevue, Washington, many frequent cus-tomers of Wal-Mart go there “because it is practical, not because theylove to go there. Customers want to be in love, and if they don’t findit, they’ll settle for price and convenience. We didn’t pave over para-dise in the ‘50s and ‘60s; some smart business people recognized aneed and they developed a very effective way to meet it. Wal-Mart isthe logical consequence of a trend that began then, and it will con-tinue to dominate the retail world until customers are offered some-thing better.”3 Unless Wal-Mart changes in significant ways, it couldjust be a matter of time before its stakeholders start rebelling againstit to a far greater degree than they have so far. As we discuss later inthe book, there are some encouraging signs that Wal-Mart now rec-ognizes its problems with various stakeholders and is starting to takesteps to address them.

Of course, millions of customers do shop routinely at many othercompanies to which they feel no emotional attachment. Customerscan be loyal in behavior to a company without being loyal in attitude.Attitudinal loyalty comes from emotional attachment, a force thatcauses a customer to drive past a Sam’s Club near her home to shop ata distant Costco instead, for example.

The logical “left brain” says you should shop at Wal-Mart so thatyour shopping trip ends up saving a few bucks. However, the emo-tional right brain may not welcome the experience. Integrating thetwo sides is one of the secrets to Target’s success. “Tar-zhay’s” customers get low prices, as well as a pleasant experience and more-stylish products than they would find at Wal-Mart. Now consider theimpact of these experiential differences from an investor’s perspec-tive: Wal-Mart’s stock has been stagnant for the past five years whileTarget’s has risen nearly 150 percent.

The social transformation of capitalism is being driven by culturalchanges of tectonic proportions that corporations, governments, universities, religions, and just about every other kind of cultural

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institution ignore at their peril. This book examines the nature of thistransformation, why it is happening now, and what it will take forcompanies to succeed in this new environment. Companies thatignore capitalism’s “extreme makeover”—to borrow a recently coinedterm in television entertainment—could have a short life expectancybecause the forces driving this makeover have been culturally legit-imized. They cannot be stopped. They have become part of who weare in these times. A company has the choice of going with the flow ofthese forces and being lifted to new heights or being drawn under bythe churning riptides of major historic change.

What Is a Firm of Endearment?The title of this book testifies to deep-seated changes in how peoplesee things in mainstream business culture. Consider the words affec-tion, love, joy, authenticity, empathy, compassion, soulfulness, andother terms of endearment. Until recently, such words had no placein business. However, that is changing. Today, a growing number ofcompanies—including every FoE cited in this book—comfortablyembrace such terms. That is why we coined the phrase firms ofendearment. Quite simply, an FoE is a company that endears itself tostakeholders by bringing the interests of all stakeholders groups intostrategic alignment. No stakeholder group benefits at the expense ofany other stakeholder group, and each prospers as the others do.These companies meet the tangible and intangible needs of theirstakeholders in ways that delight them and engender affection forand loyalty to the company.

FoEs connect with their stakeholders at a deeply emotional level.We know from recent brain research that loyalty is rooted in emo-tions, not reason. Neurologist Antonio Damasio, who heads the USCCollege Brain and Creativity Institute, has extensively studiedpatients with normal reasoning abilities who have suffered severetrauma to the right frontal lobe of the brain. Such an injury snuffs outthe patient’s ability to experience “secondary emotions,” which aremediated by cortical processes in the right hemisphere of the brain.Primary emotions originate in the amygdala, located in the midbrain,and represent our most primitive emotions. We engage secondary

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emotions to hold primary emotions in check, an action frequentlynecessary in social interactions. Patients who can no longer experi-ence secondary emotions suffer a severely impaired sense of self. Thisprevents them from “connecting the dots” between themselves andother people and objects, impairing their ability to sustain loyalty inrelationships.4

During the 1990s, the mantra “go for share of wallet” was popularamong marketers. What it stood for became the primary focus of so-called customer relationship management (CRM). However, the termsignified an emotionally barren, largely quantitative view of cus-tomers. In fact, for the vast majority of companies, CRM has beenmore about deeper exploitation of customers through data manage-ment than about empathetically responding to their needs. Whoevercoined the term customer relationship management would have beenmore on the mark had he or she called it customer data management.

FoEs have bought into a different idea; they strive for share ofheart. Earn a share of the customer’s heart and she will gladly offeryou a bigger share of her wallet. Do the same for an employee, andthe employee will give back with a quantum leap in productivity andwork quality. Emotionally bond with your suppliers, and reap thebenefits of superior offerings and responsiveness. Give communitiesin which you operate reasons to feel pride in your presence, and enjoya fertile source of customers and employees.

And what about shareholders? Except perhaps among day tradersand other short-term profiteers, most shareholders do enjoy feelinggood about companies in which they invest. They want good returns,but they also take delight in investing in companies they truly admire.Most do not want to feel that they are supporting a morally deficientcompany. Of no little importance, institutional investors, such as uni-versity endowment funds and pension funds, have grown increasinglypersnickety about the moral character of companies in which theyinvest.

The vast majority of companies cannot be described as firms ofendearment. Many have enjoyed success in the past, but find them-selves increasingly vulnerable and criticized from all sides. For manyyears, Wal-Mart was celebrated from Wall Street to business schoolcampuses across the world as an extraordinarily efficient company

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that had redefined supply-chain management and manufacturer-retailer relationships. General Electric was renowned for its prag-matic, hard-nosed management and its record of earningsimprovements. Microsoft was legendary for its ruthlessly hard-nosedmanagement style, its ultra-competitiveness, and its pragmatism.General Motors was the unquestioned leader of the global automo-bile industry, with a broad product line that no other company couldcome close to matching.

Each of these companies is under pressure today, while their FoEcompetitors stand tall with all their stakeholder groups and areacquitting themselves with distinction in investment markets. Wal-Mart routinely experiences roadblocks as it tries to enter new mar-kets. A relentless barrage of negative publicity concerning employeeand supplier practices has helped keep its stock price stagnant overthe past half dozen years or so, while rivals Target and Costco havethrived. GE’s stock is down 40 percent over the past five years. Itsenvironmental record has tarnished its reputation, although undercurrent CEO Jeff Immelt, GE appears to be trying to reinvent itselfas an FoE. Microsoft’s stock has fallen 25 percent in the past fiveyears as FoE Google presents it with some of the biggest challenges ithas ever faced. GM is beset by unhappy customers, employees, deal-ers, and suppliers—and is being challenged by powerful FoE com-petitors Toyota, Honda, and BMW.

The message of this book for the future is clear: Providing thatsound management is in place (no amount of moral correctness cansave a badly managed company), endearing companies tend to beenduring companies.

FoEs share a distinctive set of core values, policies, and operatingattributes. Here is a sampling:

• They actively align the interests of all stakeholder groups, notjust balance them. Instead of trading off the interests of onegroup versus those of another (for example, higher wages foremployees versus higher profits for investors or lower pricesfor customers), they have carefully devised business models inwhich the objectives of each stakeholder can be met simultane-ously and are in fact strengthened by other stakeholders. The key to this “concinnity” is that the activities of FoEs are

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executed within a system that allows for the active alignment ofstakeholder interests. That’s why these companies can doseemingly contradictory things such as pay high wages, chargelow prices, and get higher profitability.

Whole Foods captures this idea in its formal “Declaration ofInterdependence,” which acknowledges the idea that stake-holder groups constitute a family whose members depend onone another.

• Their executive salaries are relatively modest.

Costco co-founder and CEO Jim Sinegal’s salary was $350,000accompanied by a bonus of $200,000 in 2005—for heading upa company with sales of $57 billion while stock value increased40 percent in comparison with a 7 percent decline in the valueof Wal-Mart’s stock over the two years ending in July 2006. Theaverage CEO of a S&P 500 company received $11.75 million intotal compensation in 2005.

• They operate at the executive level with an open-door policy.

When Honda has a big problem, it implements waigawa—temporary suspension of social protocols based on rank—mak-ing it possible for workers on the lowest rungs to personallypresent a proposed solution to the highest executives involved.Harley-Davidson has a similar policy, except less ceremonial:Any employee on any day has access to the highest officers inthe company.

• Their employee compensation and benefits are significantlygreater than the standard for the company’s category.

Trader Joe’s pay and benefits in the first year for “novitiates”or managers-in-training comes to $47,000, significantly abovethe U.S. average for retail store managers. The total compensa-tion for store managers (known as Captains) comes to an aver-age of $132,000.

• They devote considerably more time than their competitors toemployee training.

The Container Store’s first-year employees get an average of241 hours of training versus the retail industry’s average of 7 hours.

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• Their employee turnover is far lower than the industry average.

Southwest Airlines’s employee turnover is half that of othermajor airlines.

• They empower employees to make sure customers leave atransaction experience fully satisfied.

A Wegmans Food Markets employee once sent a chef to acustomer’s home to overcome the customer’s mistake and cookthe Thanksgiving meal. Yes, Wegmans employs chefs, somefrom five-star restaurants.

• They make a conscious effort to hire people who are passionateabout the company and its products.

Patagonia tries to hire people who are passionate aboutmountain climbing. Whole Foods tries to draw as manyemployees as possible from the ranks of “foodies.”

• They consciously humanize the company experience for cus-tomers and employees, as well as the working environment.

Commerce Bank strives to give “Wow!” experiences toemployees and customers on a daily basis. Google providesfree gourmet meals around the clock for all employees.

• They project a genuine passion for customers, and emotionallyconnect with customers at a deep level. By earning a largershare of customers’ hearts, they earn a larger share of cus-tomers’ wallets.

JetBlue’s tagline is “We Like You, Too.” CEO DavidNeeleman flies the airline at least weekly, walking the aisle talk-ing to customers and discussing the JetBlue experience.

• Their marketing costs are much lower than those of theirindustry peers, while customer satisfaction and retention aremuch higher.

Jordan’s Furniture spends less than one third the industrynorm on marketing and advertising (7 percent of sales versus 2percent), while generating industry-leading sales per squarefoot that are more than five times the industry norm. Googlehas built one of the most valuable brands in the world in a fewshort years without any advertising.

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• They view suppliers as true partners and encourage suppliersto collaborate with them in moving both their companies for-ward. They help suppliers reach higher levels of productivity,quality, and profitability. Suppliers, in turn, behave as eagerpartners, not as beleaguered and indentured servants.

Honda is said to “marry suppliers for life”; when a supplier hasgained admittance to the Honda family of suppliers, the com-pany does everything it can to help the supplier improve qual-ity and become more profitable.

• They honor the spirit of laws rather than merely following theletter of the law. They apply uniformly high operating stan-dards across the world, regardless of local requirements thatmay be considerably less stringent.

IKEA’s policy is that if strict laws concerning chemicals andother substances are imposed in a country where it does busi-ness, all suppliers in all countries must conform to such laws.

• They consider their corporate culture to be their greatest assetand primary source of competitive advantage.

Southwest Airlines has an elected “Culture Committee” of 96employees charged with nurturing the company’s unique culture.

• Their cultures are resistant to short-term, incidental pressures,but also prove able to quickly adapt when needed. As a result,they are typically the innovators and breakers of conventionalrules within their industries.

New Balance shuns the standard industry practice of payingstar athletes for endorsements.

Although financial data surely is important in analyzing a company’sstrength and future prospects, qualitative indicators are no lessimportant. In fact, we would go so far as to say that in many instances,qualitative factors may be more revealing than quantitative factors indrawing a picture of a company’s future performance. As we observein the next section, companies whose prospects look great based onfinancial indices in one year may present a sadder picture a couple ofyears later. Qualitative indicators, in contrast, tend to be more stable.

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FoE Stakeholders

This book is organized around the five major stakeholders of moderncorporations. As a memory tool, we have listed them below in a waythat creates the acronym SPICE.

Stakeholder Definition

Society Local and broader communities as well as governments andother societal institutions, especially nongovernmental organizations (NGOs)

Partners Upstream partners such as suppliers, horizontal partners, and downstream partners such as retailers

Investors Individual and institutional shareholders, lenders

Customers Individual and organizational customers; current, future, and past customers

Employees Current, future, and past employees and their families

As Figure 1-1 shows, each stakeholder is important in its ownright, and each is also linked to all of the other components. As withany good recipe, the individual ingredients come together to formsomething completely new; as the expression goes, the whole isgreater than the sum of the parts.

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INVESTORS

FoEPARTNERS CUSTOMERS

SOCIETY EMPLOYEES

FIGURE 1-1 The SPICE stakeholder model

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Each of these relationships is an essential piece of the puzzle,and each must be managed in a way that (a) a two-way flow of valueexists between both parties to the relationship, and (b) the interests ofboth parties are aligned. This is the essence of great management. Itis what all corporations should strive for. It is the way to maximize thereturns to society of all the investments that flow into every organiza-tion. It is the Firms of Endearment way.

Identifying Firms of EndearmentHere is how we identified the companies featured in this book. Ourprocess can be described as “organic and analog” rather than “mech-anistic and digital.” We were interested in identifying a representativesample of firms that met our humanistic criteria. We had no interestin conducting a statistical analysis of a plethora of companies insearch of those whose financial performance supported the FoEhypothesis that companies can do well while doing good. Also, we didnot want to exclude private companies from our analysis. As wedemonstrate ahead, some of the best-managed companies from astakeholder perspective are privately owned.

Whereas many companies we selected are well-known nationaland international players, others came to our attention because theirnames kept coming up when we asked people, “Tell us about somecompanies you love. Not just like, but love.” Well, who doesn’t like totalk about their loves? We didn’t ask people to identify companiesthat they loved as customers or employees, or because the companiesdid some great things in their community. We left the reasons for lov-ing up to them. We asked for nominations from thousands of peopleall over the world, including business professionals, marketing profes-sors, MBA students, and about 1,000 consumers. We generated hun-dreds of candidate companies, many that are household names andmany that we had never heard of. We then put them through ascreening process that assessed the quantitative and qualitative per-formance of each company for each of the SPICE stakeholders. Wealso probed for vulnerabilities, asking questions such as these: Wouldmost people say that the world is a better place because this companyexists? How extensive a track record have they built? Do they have

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intensely loyal customers? How well do they treat their part-timeemployees? How high is their employee turnover? Do they have areputation for squeezing their suppliers? Do communities welcomethem or oppose them when they try to enter or expand? Do they havea record of environmental violations? Do they follow uniformly highstandards of conduct worldwide? How have they responded to indus-try downturns or crises of confidence? Do they waste money onunproductive activities (such as advertising sales every week)?

Most studies of corporate exceptionalism (or “greatness,”to use Jim Collins’s term) start with financial performance andwork backward. We started with humanistic performance—meeting the needs of stakeholders other than shareholders—and worked forward (see Figure 1-2).

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STAGE 1: Identify candidate companies

STAGE 2: Initial screen for FoE criteria

STAGE 3: In-depth research on 60 companies

STAGE 4: Select final set of 28 Firms of Endearment

STAGE 5: Investor analysis of public companies

FIGURE 1-2 How we selected FoEs

We picked the most promising 60 or so of the companies thatbubbled up through our exploratory research and assigned teams ofMBA students to research them. We directed the teams to conductsecondary and primary research (through interviews with executives,

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employees, customers, analysts, and others) on the companies, cover-ing all major stakeholder groups: customers, employees, suppliers,communities, governments, and investors. When each project wascompleted by its assigned team, the other research teams assessedthe results to gauge the extent to which a company qualified as a com-pany loved by its stakeholders (that is, was qualified to be called afirm of endearment). The projects were completed over a two-yearperiod. Some companies were investigated multiple times.

It is important to point out again that what we have in thisbook is an illustrative list of firms of endearment, not anexhaustive or definitive one. One of the great pleasures of workingon this project has been learning about many more such companies.In fact, if you would like to nominate a company that we should con-sider incorporating into this ongoing research project, please visit ourwebsite (www.FirmsofEndearment.com).

It is also important to point out that none of these compa-nies is perfect; each has areas in which it is relatively weak orsomewhat vulnerable. Generally, these weaknesses are confined toone or at most two stakeholder groups. On the whole, however, thesecompanies are quite exemplary in significant ways. And finally, wedo not claim that when a company adopts the SRM businessmodel that characterizes FoEs, that company will forevermore be a great investment. Even the fortunes of FoEs rise and fall due to any number of conditions. However, our research sug-gests (at least anecdotally) that FoEs tend to have quicker responsesto challenges and weather changes in market conditions with less disruption.

At the end of this stage of the research process, we went throughthe findings again and selected 30 companies that we believed bestexemplify a high standard of humanistic performance. Then, and onlythen, did we conduct a detailed comparative analysis of these compa-nies from an investor viewpoint. Our expectation at this stage was thatthese companies probably performed better than the “average” com-pany, but not by a huge amount. After all, they pay their employeesexceptionally well, deliver great products and experiences at fairprices to customers, and spend significant resources in the commu-nity—surely, all this should lead to a reduction in profits and thus the

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stock price. As we are often reminded, there is no free lunch, cer-tainly not in the corporate world.

The Firms That Made the Final CutAmazon Honda Southwest

BMW IDEO Starbucks

CarMax IKEA Timberland

Caterpillar JetBlue Toyota

Commerce Bank Johnson & Johnson Trader Joe’s

Container Store Jordan’s Furniture UPS

Costco LL Bean Wegmans

eBay New Balance Whole Foods

Google Patagonia

Harley-Davidson REI

How Firms of Endearment PerformImagine our surprise, then, when we completed our investor analysis.These widely loved companies (those that are publicly traded) out-performed the S&P 500 by significant margins, over 10-, 5-, and 3-year time horizons. In fact, the public FoEs returned 1,026percent for investors over the 10 years ending June 30, 2006,compared to 122 percent for the S&P 500; that’s more than a8-to-1 ratio! Over five years, the ratio is even higher, because theFoEs returned 128 percent, while the S&P 500 only gained 13 per-cent. Over three years, FoEs returned 73 percent versus 38 percentfor the S&P 500.

Note that the relative gap in performance over the past five yearsprovides even more compelling support for the FoE hypothesis thanthe gap over a 10-year horizon. This is because the five-year analysisspans a period during which there was a deep recession in the UnitedStates (and worldwide, for that matter). This period started with thebursting of the dotcom bubble. The market has struggled to breakeven ever since. However, FoEs engender such loyalty and a sense ofcommon cause with their stakeholders that they seem far better ableto withstand market downturns than their competitors.

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If this is not a “feel good” story, we don’t know what is. In fact, itis much more than a feel good story—we find it to be a deeply inspi-rational one. Apparently, these companies have figured out that notonly can you have your cake and eat it too; you can also give some toyour friends, donate some to a soup kitchen, and help support thelocal cooking school. How is it that these companies can be so gener-ous to everyone who costs them money (customers, employees, sup-pliers, communities) and still deliver superior (some would sayspectacular) returns to investors? The answer to that importantquestion is what this book is all about.

Firms of Endearment vs. Good to GreatCompaniesWe were interested in one more comparison. Jim Collins’s bestsellingGood to Great identified 11 companies that it described as goingfrom “good” to “great” by virtue of their having delivered superiorreturns to investors over an extended period of time. (The companieshad each delivered cumulative returns at least three times greaterthan the market over a 15-year period.) We compared our set of pub-licly traded FoEs with the 11 Good to Great companies. This is whatwe discovered:

• Over a 10-year horizon, FoEs outperformed the Good to Greatcompanies by 1,026 percent to 331 percent (a 3.1-to-1 ratio).

• Over five years, FoEs outperformed the Good to Great compa-nies by 128 percent to 77 percent (a 1.7-to-1 ratio).

• Over three years, FoEs performed on par with the Good toGreat companies: 73 percent to 75 percent.

Note that none of the Good to Great companies made our cut,though one (Gillette) did come close. We also have a semantic dis-agreement with that book when it comes to defining “great.” To us, agreat company is one that makes the world a better place because itexists, not simply a company that outperforms the market by a certainpercentage over a certain period of time. By our criteria, therefore, a

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company such as Altria (formerly Philip Morris) cannot be consid-ered “great” even though it may have performed handsomely forinvestors. With a broader, society-level accounting, Altria’s value isconsiderably diminished.

Great companies sustain their superior performance over timefor investors, but equally important in our view, for their employees,customers, suppliers, and society in general. We are confident thatthe companies you will read about in this book will stand the test oftime. If you are looking for a meaningful and deeply satisfying career,take a look at the opportunities these companies offer. If you are apotential customer, compare their offerings to others. If you run abusiness, consider partnering with them. If you represent a commu-nity, try to attract them to your neighborhood. If you are a businessprofessor, get this affirming message out to your students. You willnot be disappointed.

The FoE WayFoEs take an expansive worldview. Instead of seeing the world in nar-row, constricted terms, they see its infinite positive possibilities. Theybelieve fervently in the scenario of a constantly rising tide that raisesall boats to benefit everyone. Faced with a competitive threat, theydon’t look to cut prices and costs and employees, but to add value.

FoEs are bathed in the glow of timeless wisdom. Their “softness”in a hard world comes not because they are weak or lack courage, butfrom their leaders’ knowledge of the self, psychological maturity, andmagnanimity of the soul. These companies are forceful and resolutein standing up for their principles. FoE leaders have the courage todefend and act decisively on their convictions: Bezos at Amazon,Sinegal at Costco, Brin and Page at Google, Neeleman at JetBlue,Barry and Eliot Tatelman at Jordan’s Furniture, Davis at New Bal-ance, Kelleher at Southwest, Swartz at Timberland, Mackey at WholeFoods, Askew at UPS—the list goes on and on. These FoE leadersare building extraordinary, industry-transforming companies despitecarping from some Wall Street critics who reflexively view capitalismwith a human face as a threat to shareholders’ interests. The view thatcompetitive advantage can be gained through a business modelwhereby all stakeholders add value and benefit from gains in value

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simply runs counter to the views of many analysts. Such critics aremyopic in the extreme; they tend to view any stakeholders other thanstockholders as net drainers of value, rather than a broader anddeeper set of resources that can be leveraged to create even greatervalue than a company could otherwise create on its own.

To be best prepared for doing business in the twenty-first cen-tury, business executives, especially those of companies that are lead-ers in their categories, would do well to ask themselves the ultimateexistential question: “What are we here for?” They should pondersuch nontraditional (in business) propositions as, “We are not herejust to enrich investors; we have no culturally legitimized license tocorrupt minds, bodies, and the environment; we cannot justify underthe rubric of capitalism actions that are intended to tempt, seduce,mislead customers into doing what can harm them; we have no rightunder any legitimate credo to dehumanize employees or to squeezethe financial life out of suppliers with unreasonable demands.” Asleaders of FoEs do, companies of every type and size should con-sciously shape their cultures around the idea that they are here tohelp others live their lives with greater satisfaction, to spread joy andwell-being, to elevate and educate, to help employees and customersfulfill their natural potential. As leaders in companies—and otherinstitutions of public purpose—is it too much to accept as one’s man-date the obligation to listen and to see, to open eyes and minds, tohelp people focus on what matters most? These sentiments are cap-tured in our own words, but they are the sentiments of the leadershipin every FoE.

If FoEs can be described by any one characteristic, it is that theypossess a humanistic soul. From the depths of this soul, the will torender uncommon service to all stakeholders flows. These companiesare imbued with the joy of service—to the community, to society, tothe environment, to customers, to colleagues. The leaders of greatcompanies, as we define “greatness,” intuitively recognize the inher-ent need that most people above subsistence level have to serve oth-ers. FoE leaders facilitate, encourage, reward, recognize, andcelebrate their employees for being of service to their communitiesand the world at large, for no reason other than that it is the rightthing to do. The best form of corporate social responsibility is not making monetary donations to charities, but the dedicated

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involvement of everyone in a company in meaningful pursuits thattranscend the bottom line. In FoEs, it is common to see executives,managers, and frontline workers working shoulder to shoulder, forg-ing unshakeable bonds through shared service to others in all stake-holder groups. This fosters a sense of cooperation and support withinthe company. It gets employees to help each other rather than vieweach other as rivals for advancement.

These companies—their leaders, their people—have the courageto buck hallowed traditions in capitalistic theory. They are succeed-ing, even thriving, sometimes against long odds in the face of rapa-cious and unscrupulous competitors and increasingly ruinoushealth-care costs imposed on them by a dysfunctional system. Theyare holding on to their humanity in the face of overwhelming short-term pressures. We should rejoice in their success and spread theirmessage of caring for their fellow beings and their bottomless opti-mism far and wide. We have written this book in furtherance of thatobjective.

Overview of ChaptersHere is a preview of the journey you have just embarked on:

• In this chapter, we introduced the FoE business philosophyand summarized its astonishing performance in today’s chal-lenging business environment.

• Chapter 2, “New Age, New Rules, New Capitalism,” discussesthe new rules for playing the game of business in the Age ofTranscendence and offers the unconventional idea that anincreasing number of companies are behaving in ways that mir-ror the growing influence of self-actualization needs andprocesses that derive from our aging society.

• Chapter 3, “The Chaotic Interregnum,” discusses how and whythe social transformation of capitalism that is underway is hap-pening and shaping up to be a huge ideological change in capi-talistic theory and practice.

We now start looking at how FoEs manage their relationshipswith each stakeholder group.

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• In Chapter 4, “Employees—The Decline and Fall of HumanResources,” we look at how these companies deal with theiremployees, creating happy and productive work environmentsin which employees are highly motivated, valued, and wellrewarded.

• Chapter 5, “Customers—The Power of Love,” addresses cus-tomer relationships, describing the new marketing paradigmthat is emerging in the Age of Transcendence. This includeshonoring the legal as well as the unspoken emotional contractthat companies have with their customers, and indeed, with allstakeholders.

• Chapter 6, “Investors—Reaping What FoEs Sow,” deals withinvestors. We show how companies can and must relate to theirinvestors in financial as well as emotional terms.

• Chapter 7, “Partners—Elegant Harmonies,” addresses busi-ness partners, including suppliers, distributors, retailers, andothers. As companies outsource more and more value creation,business partners are becoming increasingly crucial to success.This chapter shows how FoEs manage these vital relationshipsin a symbiotic and mutually beneficial way.

• Chapter 8, “Society—The Ultimate Stakeholder,” deals withhow FoEs relate to the world at large, including the communi-ties within which they operate, competitors, governments at alllevels, and nongovernmental organizations. We view society asthe ultimate stakeholder because it subsumes each of the otherstakeholders within it. The key message here is that FoEs areenthusiastically welcomed into the communities where theyoperate and view governments as partners in value creationrather than adversaries.

• Chapter 9, “Culture—The Secret Ingredient,” addresses issuesof leadership and corporate culture.

• Chapter 10, “Lessons Learned,” summarizes what we havelearned about the FoE way of doing business.

• Chapter 11, “Crossing Over to the Other Side,” concludes thebook with a vision of the “simplicity on the other side of com-plexity” that describes the FoE management philosophy.

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Endnotes1 Ronald W. Clement, “The Lessons From Stakeholder Theory for U.S. Business

Leaders,” Business Horizons, (2005) 48, pp. 255–264.2 www.saatchikevin.com/workingit/myra_stark_report2002.html, 2002.3 “Where Wal-Mart Can’t Dance: Changing the Rules of the Game,” HartBeat,

March 25, 2004 by The Hartman Group, Inc.4 Antonio Damasio, Descartes’ Error: Emotion, Reason and the Human Brain,

Grosset/Putnam, 1994, especially Chapter 3. Damasio describes his emotionally-deprived patients as “cold-blooded,” meaning that they are incapable of “assign-ing different values to different options” (page 51). Thus, lacking normalemotional functioning in the brain’s right hemisphere, these patients are unableto conduct the qualitative assessments that lead to bonded relationships despiteretaining their ability to conduct quantitative assessments. The product of quan-titative assessments apparently must be validated by emotionally mediated qual-itative assessments before a bond of loyalty can take shape and be sustained.

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