The Firms of Endearment

The drive from Anchorage, Alaska to Denver, Colorado is 3,426 miles and on the 28th of September 2013 I strapped a gas can on top of my 94-4 explorer and ventured into the wilderness. When I arrived in Denver five days later, the purpose of my career had become clear. What happened to me deep in the Canadian Rockies is the subject of this episode. My name is Nathan Havie. And I'm Amanda Catherine Roman. Welcome to episode 2 of 10 Things You Should Know About Stakeholder Capitalism. The groundbreaking discovery we shared in episode 1 is not an isolated case. Rather, it is part of a pattern that includes many other companies. You'll get to know seven more of them as this mini-series unfolds. But right now we want you to meet one of the most prolific thought leaders in this field that helped us understand how all of this works in a more traditional business context. His name is Raj Sosodia and the second thing that you should know about Stakeholder Capitalism is actually a book he wrote called "Firms of Endearment". I listened to the audiobook version on my journey back in 2013. And this book is what happened to me out there in the wilderness. It has changed many, many lives, including mine. And the story that lies ahead might just change yours too. So what's in this book and where did it come from? That is what lies ahead. Here's Raj Sosodia. So around 2004, I was a marketing professor at Bentley University, almost 20 years. And for a lot of that time, I was dissatisfied with the story of business and especially with the practice of marketing. For about 10 years, a lot of my work had focused on the dysfunctions of marketing. Like 85% of people don't trust marketing. If it is marketing, that means it's not real. It's not true, it's just marketing. So the positive side was it stimulates demand. But at the same time, it leads to overconsumption. It led to the rising obesity crisis, ill health in general, and also the psychological consequences. The way women are used and how harmful that is, eating disorders and body dysmorphia and depression. So there's a real cost. And so I was pretty cynical about marketing. I would almost say at some level I was embarrassed to be a marketing professor. Perhaps some of this also goes back to my father. He got a PhD in plant breeding in cytogenetics. So he's trying to cure a world hunger. And I get a PhD in marketing. I'm trying to sell you some more potato chips. It wasn't inherently noble or uplifting. So there was no sense of higher purpose. If anything, it was part of exploitation and manipulation in the world. So when we did the analysis of marketing spending around 2004 and we came to an estimate of roughly a trillion dollars, I also happened to come across a statistic that the GDP of India that year was a trillion dollars. I can 1.1 billion people live on what we are spending here on ads, coupons and jack mail. On a poor capital basis, that came to something like $3,300 per person. It was more than 85% of the world's population lived on. And so I actually started a book with the title, The Shame of Marketing, to talk about everything that was wrong with marketing. But fortunately my mentor looked at that book and he said, you know, Raj people would rather hear about the solution and not the problem. So do we have a solution to offer? And that simple insight turned my thinking around and I said, yeah, it's so true that I've been admiring the problem for 10 years. But really, what was the solution? So I said at macro level, what I'm arguing is that companies spend a ton of money and get lousy outcomes. Right? Spending had gone up and customer loyalty and trust had plummeted. You know, companies are trying to buy loyalty and trust by spending money. Now you can't really buy those things. Those are things you earn. So to me, the opposite of that was which other companies that spend less money and marketing and yet their customers love them and are fanatically loyal to them and trusting of them. And we started to examine their marketing practices. And very soon we found that there was not a lot to be said there because these companies weren't focusing a lot on marketing. They didn't have ad agencies, typically they didn't have chief marketing officers. There was a sense of purpose. There was a stakeholder orientation and those two things went together. Then of course we found that their leaders were different. They weren't your typical Fortune 500 CEO, you know all about shareholder value and quarterly returns and so forth. There were people who actually cared about the purpose. They were deeply invested in what that business was about and they cared about people. So it wasn't just about their ego or money or power. And people who resonate with that want to work there and they want to buy from them and they want to supply to them and they want to invest in them etc. So that purpose and the related core values that becomes a strongly aligning force for all of these stakeholders to essentially feel like they are on the same side of the table. There's no adversarial mindset. They're all trying to be part of the same enterprise. So what we found was that there was a bigger story here. We started working on this work. We actually went through 13 iterations of the book proposal before any publisher would sign because they saw it as soft. They said, okay, you're talking about companies that are about love and care and so forth. And all of that is fine but that's not what sells in the world of business. So what we did was we found this pattern and then we said let's find more companies that seem to fit this pattern. And we asked people to nominate companies that they love and then we ultimately selected 28 that fit the criteria most closely and that included 18 public companies and 10 private companies. So Whole Foods was one of our early case studies. At that time Whole Foods only had one store but the store had been a big success from day one. People loved it. They loved the product selection. They loved the culture. You know, just created this vibrant community in Austin. And then the Memorial Day flood. In just four hours over six inches of rain fell in Austin, water was reported 30 feet deep in some areas. The Whole Foods store was completely decimated. Businesses along North La Mara were among the hardest hit. 6 feet, 7 feet of water. It's everything's gone. So everything in that store was destroyed, all the equipment, the refrigeration, as well as the cash registers and all the inventory. And so that morning they were $400,000 in the red after this flood happened. And they saw no way of recovering from that. So this founders are standing there as they see the wreckage. And the next thing that orders was some of their customers started showing up and people who lived in the neighborhood started showing up. They carrying buckets and mobs and towels and rags. And they said, "Come on, let's clean this up. Let's get working. Why are you just standing around and moping here?" The founders said, "Guys, we don't know if we can reopen. We don't even know if we can pay you anymore because we have nothing right now." And they said, "It's okay. We don't want to just stand around. So we'll see if we can do it. It's okay." And so that kind of became a known story around time. We've seen what's happening over at Whole Foods. People are just showing up and volunteering. It's like, "It's just a for-profit business. This is not the Red Cross." And then people started putting up signs and having bake sales and little music concerts to raise money for Whole Foods. So some of the suppliers got rid of this and their suppliers, many of them, were much larger than this tiny little company. And they said, "Wow, you guys are doing something interesting here. If you ever do open up again, we will just talk you on credit and we'll write off some of what you owe us." Bankers came around and they said, "Wow, we've never seen anything like this. So if you do get back up, we're willing to double your credit limit. Even though you're not credit worthy by any of our standards, we'll actually see something special here." Friends and family who had invested in the business, they also came around and said, "Wow, we're going to double our investment. We're going to reinvest whatever we invested before because this thing is worth saving." So about three weeks after that flood happened, Whole Foods actually reopened. It conveyed to the founders to John Mackey and others that stakeholders really do matter. And it also instilled in them a deep sense of gratitude and a strong sense of responsibility towards those stakeholders. We have to do everything we can to be worthy of this love. So that I think became part of the DNA of the company, which is now only 18 billion in revenues and 110,000 employees and 25 million regular customers would not have survived. Were it not for the fact that they had created an entity that was so loved by everybody who did business with them? No, I had never heard of a story like that. And I was so deeply moved that I literally had tears in my eyes. As I was trying to ride, I couldn't see my computer screen. I said to David Wolf sitting across the damning table there. I said, "David, I've never had tears of joy connected to my work before. I've often had tears of disappointment or frustration or anger." I said, "I think my purpose just found me." At that point, we said, "Okay, now let's do the financial analysis." And so we said, "Okay, let's look at how they do for their investors." Because we were told it's a dog-eat dog world in the world of business, and only the paranoid can survive. You have to be reasonably focused on performance at all costs. And we knew that none of these companies used the language of shareholder value maximization, profit maximization, etc. They talked about their purpose and their values and their culture and their people. We know that they're paying their people well, the frontline people. Cost goes under the companies. They were paying double of all matter at the time. Container's store was one of the private companies, but they were also consistently as a policy-paying double, the prevailing retail wage. They were providing better benefits. Starbucks, as an example, was providing healthcare even to part-time workers. So they're spending a lot more there. On customers, they were investing in the customer experience. They had generally profitable suppliers. So they were not squeezing. Like Walmart at the time had a reputation for really squeezing. We knew that they were spending more in the communities. They were investing in the environment. And we also found that they were paying taxes at an average rate of 34%. Which was really high. Maybe at the end of the day, there's less left over for investors because investors get paid last. And what we actually found was that these companies outperformed the market by 9 to 1 over a 10-year period. And we were frankly shocked. We said, "Come on, this can't be. Maybe we made a mistake. That's redo the analysis. Maybe we misclaced a decimal somewhere." So we did that. No, the numbers were fine. And then we said, "Maybe there's outliers. Maybe Google is driving the whole thing. Or maybe Whole Foods is driving the whole thing. Or maybe Starbucks is driving. These were all high-flying stocks." So we took out each of those companies from the analysis. And still we found dramatically higher performance. So we said, "Yeah, there is something here that they are generating more profits even while they are not striving to maximize profits. We start to look at why this performance existed. It really went back to our starting point of this whole research. These companies generally spend much less money on marketing. Whole Foods was 90% below, and many of the other Starbucks at that point had never run a single ad in their history. And some that did run were still comparatively much less than they didn't do all the sales and the price gimmicks and all of those things. So there was a big saving there. And that goes straight to the bottom line. Employee turnover was the other big story. Cost goes employee turnover was I think 7%, Walmart was 70%. You know, Walmart had to hire 2 million people a year just to replace those who voluntarily left. So there's a huge cost associated with that. And then the productivity of people you just hire versus people who have been there for five years is very different. And those are two big areas of spending, right? So they're saving money in areas where it doesn't really add value to spend money. And they were spending money in areas where it did. Being there people better, providing better benefits, investing in the customer experience, etc. etc. All of those things ultimately create value. And so there's a mindset that business is not a zero-sum game that you don't have to squeeze one stakeholder to benefit another. That everybody matters and we can do business in a way that everybody wins. And there's a commitment I think over time that if anybody is losing then we're not there. If any stakeholder is not doing well, that means we don't have a viable system. And I came up, I forget how I came up with the title but one day I just said firms of Endearment. It was based on that movie terms of Endearment. When I was at some level embarrassed to be speaking of such things. And that was driven home to me a few months before the book actually came out. I was in New Jersey and I was doing an executive education program, more traditional business stuff. So at lunch I was sitting with those participants and one of them asked me, "So what are you working on now?" And I said, "Oh, I'm really excited. I've got a book coming out in February." It's called "Firms of Endearment." And without skipping a beat, the guy immediately said, "Oh, I would never read that." And he wasn't even joking. So what do you mean? He said, "Well, if I was sitting in an airplane holding a book with that title, I would be embarrassed if anybody I knew walked by." And I was just like stunned silent. And I said, "Oh my God, I've written a book that people don't even want to be seen in public with." But something within me knew that this was true to who I was and that I would have to sink or swim with this. The book came out in February of 2007. Really nothing happened immediately. The book had no PR to speak off. Publisher didn't do anything. So David Wolf, my co-author, was at a conference somewhere and then he was flying back and he happens to be sitting next to a woman and he told her about the book. And she said, "Oh wow, that sounds great. My friend John Mackie would love that. Can you send it to me?" And within a few weeks John reaches out to us and he said, "I read your book and I read all the major business books that come out. I resonate with this book more than anything else I've read." And what can I do to help? What this book gave him was two things. One that I'm not alone. These are all food stores are complete outlier. You know, any gathering of CEOs, he would feel like they were talking one language and I'm talking another language. So this gave him the sense that there's a lot of companies like this out there and then secondly, the financial performance, the whole food was doing well but again that could be an aberration. You know, crunchy granola, hippie, you know, type of outlier business anyway. Everybody said, "Well, that's okay for whole foods but we're running a real business over here." So this kind of gave the sense that this is a bigger and a broader idea. This is a whole different story of business. We need to understand this more, investigate it more and create an alternative paradigm for business that is much more compelling and it's better for everybody. Ultimately when I met John Mackie and I said, "John, this is what I want to dedicate the rest of my life to." And he looked at it and he said, "That's exactly my vision, Raj, but I like the phrase conscious capitalism." That was the beginning of the conscious capitalism movement. This book was transformative for me. It marked a turning point. Putting me on the path that I have been on ever since. And I've heard from people all over the world about how this book impacted them. There's a lot of people in the world who want to believe that they can be good, loving, kind, compassionate human beings and that they can succeed in the world of business. Because the narrative they were told, which is what my father told me, is that the world is going to eat you alive. You need to be rough and tough and kind of cynical and don't trust anybody and watch our fears. You know, all of that. And that's a narrative many of us were uncomfortably trying to live with to say that we need to be this other being at work if we want to be successful and provide for our family and just be able to get by. And this book gave a lot of people permission to be who they are, to be fully human and not only would that not come at a penalty, that that actually would be the route to superior performance. And that is a very comforting message. Ten things you should know about stakeholder capitalism is a project of the Institute for Corporate Transformation. This episode was edited by Nathan Church and produced by Havie Pro Cinema. The music you heard in this episode was from Mr. Moo and Stephen Gunthines. Ten things you should know about stakeholder capitalism is for inundirected by Nathan Havie. If you'd like to know more about the firms of Endearment, there is a lot of great information at wait for it. Firmsofendearment.com. We hope you'll join us for episode three where we take a closer look at the key management practice that drives the performance of firms of Endearment. Here's a taste. In the summer of 2009, Southwest Airlines had a difficult decision to make. To charge or not to charge for bag sheets. It was estimated that Southwest would gain 450 to $550 million per year if they charged for the first and second checked bag like the other airlines were doing. You may already know how this story ends, but we're going to take you inside the border to see exactly how Southwest Airlines in an industry defined by bankruptcies and bailouts has managed to turn a profit every single year of its existence.