Common-Sense Capitalism

Profit, profit, profit! That's where most corporations -- and investors -- concentrate in their all-important pursuit of maximum shareholder returns. But many corporate managers also use this quest as an excuse when their blind pursuit of short-term profits screws things up for the long term -- even when they've destroyed shareholder value along the way.

The Economist recently published an article on the growing push toward "stakeholder capitalism," in which businesses expand their focus beyond shareholders to embrace customers and employees as well. While such sentiments might make some modern investors shudder, I think a shift like this shouldn't be controversial. If anything, it's common sense.

Let's take a good look at several companies that forgot about their customers and/or employees, and contemplate the risks and ruin they imposed upon shareholder value.

Blockbuster (NYSE: BBI  )
Before Netflix (Nasdaq: NFLX  ) revolutionized DVD rentals, Blockbuster was happy to rest on its laurels, profiting off late fees that increasingly annoyed its own customers. In effect, its lax attitude toward its customers' happiness fed renters' resentment, inviting Blockbuster's own disruption. I doubt many former customers now shed bitter tears about the former rental giant's current precarious situation.

A glance at the company's five-year stock chart reveals a terrible ride for long-term investors, making Blockbuster a dangerous stock as it now struggles to survive.

Goldman Sachs (NYSE: GS  )
I'm not sure which problem Goldman Sachs shareholders should worry about more: the company's ugly public relations woes, or government allegations that Goldman committed fraud.

Both pitfalls raise questions about whether Goldman cares for anything but itself. A recent Associated Press article quoted an unnamed source as saying that rivals often point out to prospective clients: "Look, you never really are a client of Goldman. The only client of Goldman is Goldman." Ouch.

Also, note that Goldman's shares have fallen 20% since the SEC announced its investigation a couple weeks ago. A company that exhibits signs of ruthlessly selfish motives can endanger its reputation, its legal well-being, and its shares' performance.

Circuit City
The electronics retailer is dead and buried, but it still serves as a perfect example of what happens when management pursues the wrong priorities. Many suspected that when Circuit City fired its experienced salespeople to hire cheaper, inexperienced labor, it would not only ruin morale, but also cede advantage to customer-centric Best Buy (NYSE: BBY  ) . Circuit City's loss was the survivors' gain; Best Buy has recently touted its market-share growth.

Unconscious capitalism: Asleep at the wheel
Though stakeholder-driven capitalism might defy many investors' economic dogma, it's hardly new or untried.

Whole Foods Market's (Nasdaq: WFMI  ) John Mackey has long advocated conscious capitalism, a holistic, stakeholder-driven concept that incorporates the needs of customers, workers, suppliers, and shareholders alike. In speeches and debates, Mackey has often asserted that when all these stakeholders are happy, long-term success (and profits) are more likely to follow. By his reasoning, integrating these principles into a company's mission would make it a far less risky investment idea.

In addition, corporations that attempt to maximize the happiness of all their stakeholders over the long haul have a better chance of transforming both customers and workers into an army of positive evangelists. This kind of word of mouth can give companies a priceless advantage against more clueless competitors.

Take "net promoter scores." This concept, put forth by Harvard Business Review years ago, separated surveyed customers into "promoters" and "detractors," and found that the percentage of respondents who fit into those two categories directly correlated to a company's revenue growth. Taking such scores into consideration could clearly help shareholders find the best companies for the long run.

A return to long-term common sense
Shareholders, stop believing that only short-term profits matter. Embrace the ownership of your companies, and expect your investments' management to act responsibly and ethically toward all its stakeholders. Investors like us have been part of the problem; we must learn to be patient and prudent as our stocks pave responsible, stakeholder-friendly paths toward long-term riches.

Companies that brutalize and abandon important stakeholders often disappoint their investors in the long run. But businesses that focus on customers, employees, and shareholders will likely yield better performance, becoming stocks we can be proud to own. That's not just common sense -- it's also good capitalism.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Best Buy, Netflix, and Whole Foods Market are Motley Fool Stock Advisor selections. Best Buy is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a bull call spread position on Best Buy. The Fool owns shares of Best Buy. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2010, at 3:53 PM, catoismymotor wrote:

    You're going to catch some heat for this one. Too bad, because I know you are spot on about this.

    + 1 Rec

  • Report this Comment On April 30, 2010, at 5:40 PM, stan8331 wrote:

    Couldn't agree more. There's nothing vague or mystical or anti-capitalist about this idea. As you point out, treating all stakeholders well is critical to long-term profitability because you NEED customers and employees to be able to generate those profits over time. The only people who may benefit from excessive focus on short-term profitability are short-term traders - definitely not the group of folks about whom a wise company should be most concerned. Economic history is littered with the carcasses of companies that believed they could enhance profitability by treating their customers and/or employees badly.

  • Report this Comment On May 01, 2010, at 4:09 AM, Minbani wrote:

    Any business today who wants to grow and be around in twenty years time will need to start looking at ALL stakeholders in any enterprise.

    It's not a new philosophy by any means ~ look at the way Taiwanese businesses are structured. It works gangbusters.

    Greed has to be reigned in before it destroys the world as we knew it. Hauling Goldman Sachs to account was long overdue but a major step in the right direction.

  • Report this Comment On May 01, 2010, at 12:58 PM, ScottRichard wrote:

    One fine example of a balanced focus is the former McCaw Cellular Communications. Craig McCaw lived and breathed a dedication to PQP--People, Quality and Profits--and built the powerhouse that sold to AT&T for $16 Billion. I was fortunate enough to have worked for Craig, along with several thousand other employees who worked extremely hard to focus on customer satisfaction while creating and maintaining a quality network in more technically challenging times. I had never been treated so well as an employee in the previous 20 years. Take care of your employees and they will take care of your customers. Respect your suppliers and they will support your needs. Value your shareholders and they will stay with you in rough times.

  • Report this Comment On May 01, 2010, at 1:04 PM, TMFLomax wrote:

    Thanks for the feedback, folks! And ScottRichard, thanks for the example that you experienced first-hand.

    Alyce

  • Report this Comment On May 01, 2010, at 2:55 PM, goalie37 wrote:

    Great article as usual from Alyce. +1 rec.

    Only problem I have is using WFMI as the example of running a business right. I shopped at the local Whole Foods a few times and loved it....except for finding out at the cash register that I paid $100 for groceries even though it seemed like I only bought grapes and a block of cheese. I no longer shop there because of their prices. This doesn't seem like a perfect example of customer driven business principles.

  • Report this Comment On May 01, 2010, at 9:44 PM, xetn wrote:

    This article only proves the power of the market to get rid of poor performers. People vote with their dollars and if the company gets it right they prosper. If on the other hand they do not get it right, the should and do die. What is wrong with that?

    Just as an aside regarding GS, how about reading this insightful article:

    http://annistonstar.com/view/full_story/7236861/article-Trou...

  • Report this Comment On May 04, 2010, at 11:25 AM, mpendragon wrote:

    I agree that building strong customer relationships and placing value in experienced, loyal employees pays off in the long term but shareholders, both in the general public and institutional investors, are holding shares for much less time than they have in the past. This forces the leadership to work on projects that have a short term improvement in profitability.

    Frequently, this means cutting back on customer support resources or taking cost cutting measures that harm employee morale. The long term impact of these efforts is that it harms the comany's reputation and brand and can cost an employer their most talented staff because those employees have the best means to find another job.

    This is why it's a good idea to look for companies with a lot of insider ownership. This is often a sign that the leadership is in it for the long haul. They're building the company up instead of tearing some of it down for a short term gain.

  • Report this Comment On May 05, 2010, at 11:58 AM, TMFLomax wrote:

    Thanks for the additional comments! Goalie37, I understand your standpoint here, I think a fair amount of people share it. However... well, organic goods and products from small farms are more expensive by their nature. And of course, Whole Foods does do other things, like providing good benefits for employees. I think traditionally a company like Wal-Mart has had a fairly opposite approach in bringing down prices for customers, so consumers who pay more or less may be sort of choosing amongst businesses that do things in different ways. So I think there are some trade-offs here.

    Of course, the recession made lower prices at Wal-Mart seem almost "socially responsible" with so many consumers having financial difficulties, and Whole Foods had to reduce some prices in such a price-competitive environment. It's a lot to think about and your point is well taken.

  • Report this Comment On May 21, 2010, at 4:48 PM, mDuo13 wrote:

    I agree with the sentiment of the article - but how about an article with a more positive spin - focusing on the companies who get Common-Sense Capitalism *right*, not those who get it wrong? I suspect that many of these may be good buys in the long term.

    One example I can think of is Southwest Airlines. They've had top-notch customer service for ages; they seem to keep their flights on-time more often than other airlines, they're not immune to mistakes but they seem to make fixing problems much easier; they keep their business simple, prices low, not preying on customers with hugely overpriced premium rates, etc. Add a few spot-on business decisions (hedging their fuel prices) and no wonder the company is performing as well as it is.

  • Report this Comment On August 08, 2010, at 8:54 PM, TripleEFocus1 wrote:

    Excellent article! Alyce how about a Motley Fool Conscious Capitalism newsletter with a portfolio of sustainable companies - Starbucks, Interface, Whole Foods etc

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