Sunday, February 10, 2013

Sustainability, Justin Danhof, Costco, and Jason Lewis

Jason Lewis is a nationally syndicated radio talk show host, based in the Twin Cities area of Minnesota.  Justin Danhof is the General Counsel for the activist group, National Center for Public Policy Research.  He also serves as the Director for their Free Enterprise Project.

Last week, the two came together for a night of pillorying the company of Costco, based in Issaquah, Washington.  Justin Danhof, who, for the Free Enterprise Project, criss-crosses the country, attending corporate shareholder meetings, asking them the same series of questions, and then commenting later that CEO's of these corporations are ignorant and have no idea how to run a real company in a free market, was the guest of that evening's show.

According to Danhof, he stated that he brought up to the CEO of Costco that his company was a member of the Retail Industry Leaders Association (RILA), a fact that CEO Craig Jelinek had no knowledge of.  This shocked Danhof, who declared that this lack of knowledge should worry shareholders.

But it wasn't this fact that made Danhof and Jason Lewis livid.  It was the sustainability initiative that, again according to Danhof, RILA was forcing upon its members.

Danhof listed a few infractions to shareholders and consumers that Costco was currently doing.  Installing solar panels on the expansive and otherwise unused rooftops of their warehouses.  Establishing a directive that all paper used in the company would be recycled material (something Danhof said increased costs considerably), using untested and non-vetted green materials when it was completely unnecessary.  All in the interest in making the company look green.

Danhof said that all these rules and regulations, forced upon Costco by RILA, were going to have a negative effect on the shareholders and consumers.  He then presented a poll that showed that people wouldn't want to pay a penny more for "stuff" even if they knew the price increases were due to the companies environmental improvement policies (what a surprise).  When Danhof said he presented that poll to the CEO, Jelinek sputtered or refused to answer the question of whether he would be willing to pay more for a $100 cart of goods.

But, that's not how the Seattle Times reported it.  According to them, Jelinek gave an intelligent, albeit nondescript response:
We’re not in business to try to figure out how to raise prices.  Our purpose is to figure out how to reduce costs and do it in an intelligent way.
Of course. No company who wants to increase profits for the benefit of their stakeholders -  the shareholders, the consumers, the ownership (which may simply be the shareholders), the vendors, and the employees - would do something that they think would  increase prices with no good reason.

Or would they?

In that Seattle Times article, they begin by saying the following:

Right or wrong, Wall Street long has criticized Costco for not being very shareholder-friendly. It pays its employees too well — goes the argument — or it sells merchandise cheaper than necessary to win customers.
But, in Danhof's  own diatribe, he says nothing about the employees of the company whatsoever.  His chief concern is for the shareholder with a disingenuous nod toward the consumer.  But, as is usual for these types of activist groups, they have a very narrow view of what a company should or should not be doing.  And, to Danhof and his group, the shareholders were all that really mattered.

Why is this a problem?  

Danhof probably thought that, since he was at a shareholder's meeting, the people who co-owned the company would be of one mind - wanting the best possible dividend for themselves.  This is a good assessment, but fails to get to the bottom of what increases and decreases a share price.  While profits and costs are one factor, public sentiment, employee satisfaction, and future prospects for a company are also key factors.

A company that does not look to the future and see where the world is going, but simply runs their corporation on an ideological premise, paying close attention to only their bottom line for the current quarter or a few quarters into the future, is one that is bound to become stagnant, or fail altogether.  A company who takes all factors of its business into account, even though there may be slow share price growth, or a short-term dip toward a long-term profit, is better for a shareholder in the long term.

Most interestingly is the fact that RILA is a private retail association and is not run by any public government anywhere.  This is a key point because, in Danhof's own words, the sustainability initiative is not allowing the "free market to work".  But, RILA being a part of the free market, this point implodes upon itself and has no teeth.

Even more to the point, if increased costs were a problem for Costco with this green initiative, why did they post a 2012 revenue increase of 17% with Street-beating profits up 30%?  It doesn't look like the doomsday prediction of recycled toilet paper is doing all that much to bite into the extreme success of one of the poster companies for those who think that employees deserve to be paid well for their work.

As Danhof spoke, Jason Lewis ate it up.  He loved his guest and wanted more.  He went to a caller who asked:
In order to get cheaper goods to the market, companies have moved into China where worker's rights (including children's) are routinely ignored, even and especially under the watchful eye of American corporations.  Are you suggesting that Costco should do more in China in order to satisfy their shareholders at the expense of human rights?
Jason Lewis' answer was very revealing, while never addressing the question:
 Sir, you know a lot about morality but next to nothing about economic principals.
He then disconnected the caller and ended the segment, praising Danhof for his work.

While finishing my drive home, I thought about the meaning behind that response.  But, really, I don't need to explain it to my readers at all.  The meaning is so obvious.

Economic principals, no matter how vile to those they affect, should trump morality at all levels of humanity.  

This is completely unacceptable.  Costco, thankfully, is looking to the future, with a sense of morality that includes taking care of their employees well, paying their CEO a pittance compared to other corporations, and looking to the future, making sure the environment is not mismanaged on account of their actions as a company.

There is nothing wrong with that.  Especially when you grow revenues by 17% and profits by 30%.  I see no downside and think it imperative that Danhof and Lewis admit that they are wrong.  Their principles of economic prosperity in the private market can work when implemented wisely.  And I see Costco as a wise company doing just that.


  1. I drive farther and pay more since learning Costco treats its employees better. I despise the Walton heirs.

  2. This turned into a novel. Oops.

    You're implying that bad people say, "Economic principals, no matter how vile to those they affect, should trump morality at all levels of humanity."

    I agree that economic principals should not trump morality. However, I don't think that economic principals are actually the issue. Economic principals have been used as the vehicle to justify practices which are morally abhorrent. This is how Kensian economics got its rise in the 50's, 60's, and 70's. This is how Saudi Arabia's infrastructure was built on their oil money and made many people very rich. This is how the USA attempted to control Iran and had it backfire. This is now how corporations are turning their eyes on the American population as a new target.

    Welcome to Obamacare. It's been oil (Middle East, S.America, S.Pacific), energy (everywhere), communication towers (Africa), and water rights (S.America) in other countries. Several years ago the health insurance companies started merging, buying, and consolidating because they knew it was going to be "their time". They knew Obamacare was coming. Pay day for that industry. It's never been about the people, it's always been about the money.

    This whole thing with Costco is just another form of pressure to conform to larger corporate practices to make money. It's "The American Way." It would not surprise me at all if there are consultants and investors that will try to put pressure on Costco to act certain ways. One of three things will likely happen:

    1.) Costco bows to the pressure now or later.
    2.) The market turns against Costco and makes it obsolete... and by "market" I mean a series of unfortunate and secretly immoral and/or illegal events that force peoples' hands to act against Costco.
    3.) Costco somehow pulls off an amazing feat and beats the larger forces at work.

    I'm rooting for #3, but I'm not hopeful. I think a measure of compromise is more likely if #3 is to be a reality.

    Unfortunately, some of the people really do think they are promoting the right thing. They think that promoting economic principals and benefiting investors no matter the cost is what is right. It's an economic version of what happened in Iraq. Saddam was a disgusting man who committed some horrible deeds. There are people who will swear up and down that the world did EVERYTHING for completely ALTRUISTIC reasons in regards to the wars with/in Iraq.


    Those same people will say that Costco needs to do whatever it needs in order to maximize profits regardless of the moral cost.


    1. "You're implying that bad people say, "Economic principals, no matter how vile to those they affect, should trump morality at all levels of humanity.""

      Hmm... That implication was a translation of Jason Lewis' own words. I actually believe that morality should trump economic principles, so long as those principles are immoral. The fact is, many economic principles are very moral. Everyone, in this current era, needs money to live. A company that pays those people a good wage is taking part in a moral, yet economic principle.

  3. I love Costco (except for the packed store and parking lot ALL THE TIME -- I'm not the only person who loves it) and shop there instead of Sam's because, like shadowspring, I want to support a company that pays its employees well and treats them well. Unlike WalMart and Sam's, which I despise. When my husband and I joined Costco about 4 years ago, I asked the nice woman who was helping me sign up if the company treated her well, and she said emphatically yes. She said she had been an employee for a long time (about 8 years as I recall) and that Costco was a great company to work for. That was what I needed to hear. We all vote with our wallets as well as at the voting booth, and how we choose to spend our money and where can make a huge difference.