FOOL ON THE HILL
Employees vs. Customers vs. Shareholders

Who comes first -- a company's customers, employees, or shareholders? It's a question that perhaps can't be answered. Most companies stress the primacy of shareholders. Others, like arc-welding equipment manufacturer Lincoln Electric, put employees first. And we've all heard, as customers, that "your business is very important to us." A little thinking about this topic can yield some investing insights.

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By Selena Maranjian (TMF Selena)
January 31, 2002

"Quality is job one."
"Do what you love, the money will follow."
"Women and children first!"
"Creditors, preferred shareholders, then common stock shareholders."
"If you build it, they will come."

First things first, right? Everything in its place, in the proper order. But when it comes to business, what's the proper order? It seems to me that with most public companies, there are three primary parties:

  • Shareholders
  • Customers
  • Employees

Which of these should be of primary concern to a public company? It may seem an odd and perhaps ultimately unanswerable question, but if we spend a little time thinking about it, we may gain some insights into how to evaluate companies as possible investments.

I read an article recently about a very interesting company that's been on my radar screen for years. It noted that, "[The company] puts the employee first, customer second, and shareholder last." That struck me as very unusual.

Shareholders first
If you spend any time reading financial stuff, you'll see over and over again corporate managements stressing the importance of the shareholder. Annual reports are generally issued just to shareholders, not to customers or employees. (Wouldn't that be an interesting practice, though, to issue an annual report to your customers and employees? I suppose they can read the existing annual report, but its focus is on financial returns instead of customer service or employment satisfaction.)

It makes sense. If you're a public company, then you're at least partially owned by the public -- by the shareholders. The main reason you exist, some might argue, is to serve the interests of those who own you. After all, people don't invest in enterprises that solely serve others -- unless they're contributing to charities, that is.

Customers first
On the other hand, while it's important to focus on shareholders, they won't be entitled to a share of very much if a company doesn't have customers. It's the customers who contribute the revenues on which all the financial statements are based, the revenues that pay the salaries of employees, and that even pay for business cards, desks, electricity, and office parties.

It seems logical to put customers first. If you have many happy customers, then you'll likely be raking in money to support your employees and reward your shareholders. In a recent memo to his managers, super-investor Warren Buffett offered this guidance: "What should you be doing in running your business? Just what you always do: Widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs."

Northwest Airlines (Nasdaq: NWAC) is just one of many companies that purport to put customers first. Privately held Enterprise Rent-A-Car's founder, Jack Taylor, launched his business with similar sentiments. His son noted: "When my father started the business, he said that you put customers first because if they are satisfied, they'll come back. Then come the employees. By making sure they are happy, well informed, and part of a team atmosphere, they will provide the best service possible. If you put the customers and the employees first, the bottom line will happen."

Employees first
So now we've come full circle, to thinking about putting employees first. The company that I've respected for a long time now is Lincoln Electric (Nasdaq: LECO), in the glamorous industry of arc-welding equipment manufacturing. One key way that it puts employees first is by never laying any of them off. In this period in our economic history when company after company seems to be announcing massive layoffs, it's uplifting to hear of a company that has managed to avoid them. But aside from being uplifting, is the company managing to be profitable? It turns out it has, and for a long, long time -- the firm is some 107 years old.

A 1957 article from Progressive Calvinism presented Lincoln Electric as a paradox, featuring unusually high wages and unusually low selling prices. The explanation provided was high productivity. (If you'd like to learn more about Lincoln Electric, you can read a case study at the Foundation for Enterprise Development, and articles in Time.com and BusinessWeek on how the company avoids layoffs.)

Lincoln isn't even the only one with a no-layoff policy. A glance at some other firms making the same pledge -- such as Southwest Airlines (NYSE: LUV), Harley-Davidson (NYSE: HDI), and FedEx (NYSE: FDX) -- will reveal that living without layoffs doesn't necessarily put a damper on financial success. Southwest and Harley-Davidson, in particular, have proven terrific for shareholders for a long time.

Many companies treat their employees fairly well. The financial press is rife with features on the best places to work, such as Fortune Magazine's "Best Companies to Work For." Below are the top 10 companies (according to revenues) on Fortune's most recent list. Most of them have performed pretty well for investors over the past many years. (Of course, there's one painful, glaring exception, in the No. 3 spot.)

  1. Wal-Mart Stores
  2. Hewlett-Packard
  3. Enron
  4. Fannie Mae
  5. Merck
  6. Intel
  7. Microsoft
  8. American Express
  9. Cisco Systems
  10. Marriott International

[Ed. note: Fortune has just come out with its most recent list of the best companies to work for. Check it out.]

The upshot
So what's the bottom line on this topic? If your mind works anything like mine (and you've got my sympathy, if it does), you'll see this question -- attention to employees, customers, or shareholders -- as a chicken-and-egg kind of question.

It seems to me that the best strategy a company might take would be to focus on all three. You can set up employee-friendly policies, for example, but make them work in tandem with supporting a solid customer experience and boosting shareholder value. For example, let's return to Lincoln Electric. It offers employment for life, but it expressly designed its plan to prevent employees from slacking once they're tenured, by largely compensating employees on the basis of productivity. (This is arguably easier, with a manufacturer.) By focusing on customer satisfaction, you'll end up making your employees happier, too. It's a drag to work for a company that people have little respect for.

Below are some interesting questions that this topic raises for me:

  • Which companies seem to be ignoring one or two of the three parties, and in what way(s)? What are the consequences?
  • Which companies seem to be firing on all cylinders, doing right by their employees, customers and shareholders alike?
  • How have various companies been able to serve all three parties successfully? What policies or practices can we discern? Do they have any policies or practices in common?
  • What might investors be on the lookout for, when evaluating companies as possible investments? How can you tell if a company is treating all three parties well? (Some possible clues: low employee turnover, a reputation for high-quality products and/or services, high return on equity.)

I invite you to share your thoughts on any of these questions (or anything else) on our Fool on the Hill discussion board -- or just drop by to see what others are saying!

Selena Maranjian is smarter than a speeding bullet and faster than a tall building. She owns shares in Intel, Microsoft, and Cisco Systems. To see Selena's complete stock holdings, view her profile. The Motley Fool is Fools writing for Fools.