A short while ago, we read an article comparing the business practices of Cost-co and Walmart, and the differences between the two have stuck with me. The closest Cost-co to my home is almost 40 minutes, and as I wasn’t familiar with the membership-based warehouse club, I never paid much attention to Cost-co in the news. However, after we read that article, I was fascinated. An attitude of “nice guys finish last” seems to appear often in the business world, and it was refreshing to see a company that stuck to its core values so strongly and thoroughly do so well.
With that article in mind, I ventured off to the Web Of Knowledge, and searched for Edward Freeman’s Thesis on Stakeholder Theory. I have liked Freeman’s basis for morality in a company’s operations; almost everyone involved in the company is a stakeholder. Not just actual shareholders, but employees, community members, governments, maybe even competitors. It is not enough to just focus on profits anymore. So I was pleased to find Freeman cited in an article discussing the positive effects of labor-friendly policies, titled “Labor-friendly Corporate Practices: Is What is Good for Employees Good for Shareholders?“.
In short, one of the most important stakeholder groups, employees, can actually have a very large effect on a company’s profits. As the article explains, “we find a positive relation between our aggregate measure of labor-friendliness and employee productivity, total factor productivity, and firm value” (3). They also list interesting data later on in the article; out of the 58 publicly traded companies on the Fortune’s 100 Best Companies to Work For in America of 2000, 31 offer on-site university courses and 53 reimburse tuition. In other years, two different companies’ employees rank the trustworthiness of their management at 96% and 97%, respectively. Other companies have all sorts of fun extras; on-site daycare, libraries, free food and coffee, concierge services, health care bonuses, and so on.
Interestingly, they also found no correlation between labor-friendly practices and excessive management compensation. In short, management was not implementing labor-friendly practices in order to reward themselves; rather, they were exhibiting “genuine concern for employees translating into higher productivity and profitability, which in turn facilitate value creation” (33). They also have very interesting data on stock returns after labor-friendly practices were implemented, which can be found on page 43. It made me think of how the Cost-co/Walmart article compared the long-term stock results, with Cost-co boasting profits, even during the recent recession. For Faleye and Trahan’s research, short-term results (within 1-5 days) boasted cumulative abnormal returns of around 1%, and long-term results (1-3 years) boasted averages of anywhere from 11-33%. That is a staggering difference. Could you imagine an abnormal profit level of 33% above what you would expect?
This all only seems to support Freeman’s Stakeholder Theory. The Fortune’s Top Companies list is well-known and highly respected, so I trust the results that Faleye and Trahan presented, as I believe they used some very comprehensive data. I believe Freeman would be pleased with the analysis that Faleye and Trahan presented, as it proves that doing “the right thing” morally when treating your stakeholders, especially in regards to your employees, leads to short and long-term profits for your company. I think that’s an important lesson that every company should learn.