One good rule of thumb for stock research is to try to find the best, most solid businesses. And it's no secret that good, common-sense leadership is usually an important part of the package. Costco's (Nasdaq: COST ) CEO Jim Sinegal is a big part of Costco's success and a particularly Foolish CEO.
Sinegal took the discount retail model and made a powerhouse. Plus, he did what many would have thought impossible: he infused "class" into bulk shopping. Costco shoppers run the demographic gamut, from business customers to affluent treasure hunters -- after all, you may find its big diamonds worth your while, or the discounted designer clothing or high-end wine that could disappear before your next visit. It may be a warehouse with concrete floors and fluorescent lights, but its bargains and its astonishing variety have universal appeal.
No flash, just built to last
Many people are tired of the fanfare -- and sometimes exorbitantly high pay packages -- that tend to accompany superstar CEOs. However, CEOs like Jim Sinegal buck the trend. (And that's despite the fact that he was named one of TIME magazine's 100 most influential people of 2006 -- he seems to work hard to keep his feet on the ground.) Sinegal's pay is a reasonable $350,000 a year, and although he does get a bonus and stock options, they're still not nearly on the grandiose scale of some CEOs -- his last bonus was $100,000. And Sinegal takes a hands-on approach to his position, answering his own phone and scheduling his own appointments.
Sinegal makes it a point to personally visit Costco locations to see how things are running, check out how merchandise is flowing in and out, and so forth (as well as listen to the cash registers ring -- judging by how busy my nearest Costco always is, it's likely music to his ears). He recently said he spends about 200 days a year visiting his company's warehouses.
It's refreshing to hear of a CEO who is down-to-earth, running a business with "hands on" instead of from an ivory tower. Some of the recent corporate scandals could be blamed on leaders who got distracted by the greed and hubris often associated with being "superstar CEOs." It's arguable that a CEO who has let success go to his head runs the risk of focusing a little too much on what Wall Street wants over the short term, while ignoring the fundamentals of doing business for the long haul. Sinegal is certainly not guilty of that.
When David Gardner interviewed Sinegal back in late 2004, Sinegal highlighted the importance of focusing on the long term, not short-term stock prices. In Sinegal's own words, "We have to run our business, and we try not to focus on [stock price] because that is not our intention. Driving stock up from one day to the next is not what we are about. We are about building a good company and performing for the long term. I know everyone says that, that sounds trite when I repeat it that way, but that is and has always been our attitude about our business. If we do the right things, the stock price will take care of itself, and our shareholders will be rewarded."
Happy workers, smooth business
Costco is known for having one of the best retention rates in the retail industry. Although many businesses in retail balk at the expense of providing health care for workers -- discount rival Wal-Mart (NYSE: WMT ) has often been called to task on the issue of health care for its employees, although it recently made some acknowledgment of that PR issue with its new generic drug plan -- Costco is among the companies that do provide it.
When David Gardner asked about this in 2004, Sinegal responded, "Well, we are, just as every other company in America is, being challenged in the health-care arena. We have to pay attention to it. We are looking at alternatives. We are looking at all sorts of means where we can be creative and be better consumers of health care, and we are trying to get our employees to be better consumers of health care, but in the final analysis, our attitude is how can't you provide it for your employees? If you can't, what you are going to wind up doing is losing them or they are going to put themselves into a very difficult position, and we think that in the final analysis, when you do the right thing for your employees, it pays dividends, they are more productive and they are happier, and they don't leave you. Those are all nice things." Nice things, indeed.
Furthermore, in a more recent Motley Fool interview with Sinegal this summer, we asked about a New York Times article that had reported that Costco employees make an average of $17 per hour, 42% more than employees at Costco rival Sam's Club, a Wal-Mart operation. Sinegal responded that the company's turnover rate for employees who have been there for more than a year is a mere 6%, rather astounding in the retail business. Despite the fact that Wall Street has often balked at what it thinks is Costco's "lavish" treatment of employees, Sinegal is unapologetic (Foolishly so). In his own words, "Our attitude has always been that if you hire good people and provide good wages and good jobs and more than that -- if you provide careers -- that good things will happen to your company. I think we can say that that has been proved by the quality of people that we have and how they have built our organization." The plan strategy seems to be working, as Costco competes very well against direct competitors like Sam's Club and BJ's Wholesale Club (NYSE: BJ ) and big-box retailers like Target (NYSE: TGT ) .
Foolish final words
The greatest companies take a long-term approach to their businesses (even if certain common-sense strategies like treating employees well can, at times, seem almost unconventional, as is highlighted by criticism of Costco's "overly generous" treatment of workers). Sinegal leads by example; shareholders of other companies might want to wonder if their CEOs should get over themselves and get right down to running their businesses. Sinegal seems to have his priorities straight and the health of his business in mind, so I call him a Foolish CEO indeed.
For related Foolish materials, see the following pieces:
- Not too long ago I highlighted Costco as one of three feel-good stocks.
- Read our interview with Sinegal from last summer.
- In late 2004, David Gardner interviewed Sinegal in this informative four-part series.
For further cost-cutting Foolishness:
- Wal-Mart Goes Generic
- Insane CEO Pay
- Costco's Competitive Secret
- Costco's Learning Curve
- Costco's Consistency and Competition
- What Would Costco's CEO Do?