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.