Employees vs. Customers vs. Shareholders

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

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 main constituents:

• 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. These revenues pay the salaries of employees, and 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 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."

Just last week, Buffett put the interests and preferences of his customers and employees before shareholders. He terminated a beloved shareholder charitable donation program because of pressure put by some customers on his Pampered Chef employees. (You can read the details here and also follow a lively discussion of the event.)

Northwest Airlines (NASDAQ:NWAC) is just one of many companies that purport to put customers first. Privately held EnterpriseRent-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 been interested in 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 108 years old.

A 1957 Progressive Calvinism article 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), Nucor (NYSE:NUE), Xilinx (NASDAQ:XLNX), 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. (Here are some details on various no-layoff policies.)

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 on Fortune's most recent list. Not all are public companies, but some are, and have performed fairly well for investors over the past many years.

1. Edward Jones
2. Container Store
3. Alston & Bird
4. Xilinx (NASDAQ:XLNX)
5. Adobe (NASDAQ:ADBE)
6. American Cast Iron Pipe
7. TDIndustries
8. J.M. Smucker (NYSE:SJM)
9. Synovus (NYSE:SNV)
10. Wegmans Food Markets

In a similar vein are Fortune's Most Admired Companies. Below are the 2003 leaders. Many appear on lists of good employers and all have been solid long-term investments for shareholders:

1. Wal-Mart (NYSE:WMT)
2. Southwest Airlines (NYSE:LUV)
3. Berkshire Hathaway (NYSE:BRK.A)
4. Dell Computer (NASDAQ:DELL)
5. General Electric (NYSE:GE)
6. Johnson & Johnson (NYSE:JNJ)
7. Microsoft (NASDAQ:MSFT)
8. FedEx (NYSE:FDX)
9. Starbucks (NASDAQ:SBUX)
10. Procter & Gamble (NYSE:PG)

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 the question of employees vs. customers vs. 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. You might want to discuss them in your next investment club meeting. (What? You don't belong to an investment club?? Well, then consider forming one!)

• 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 discussion boards -- or just drop by to see what others are saying! (We offer painless free trials of our acclaimed boards, with no credit card information required.)

And if you're interested in discovering some compelling companies worth consideration for your investing dollars, check out Tom Gardner's latest newsletter, Hidden Gems, where he'll be digging for gold that's been overlooked by Wall Street.

[This column originally ran in January of 2002. It has been revised and updated.]

Selena Maranjian is smarter than a speed ing bullet and faster than a tall build ing . She owns shares in Microsoft, Berkshire Hathaway, and Johnson & Johnson. For more about her, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.