Here’s an idea: Be a little nicer to everyone and you’ll be more sustainable. Be more sustainable and your odds of compounding into something meaningful go up.
This seems obvious. But history is full of something else.
American business has gone through two big eras over the last 80 years.
The first started after World War II.
The war showed us what can be accomplished when people work together towards a shared goal. It sparked a greater sense of cooperation than prevailed before the Depression. As Europe and Japan’s industrial base lay ravaged by war, America also found itself in a unique position of dominating the global market for manufactured goods.
This created a new era where workers gained bargaining power over what prevailed in the early 20th century. Wages rose at all levels after the war, but actually faster for low-income workers than for high-salaried executives. People who worked were highly valued. People who held capital comparatively were not. Historian Frederick Lewis Allen wrote in 1953:
America has become more prosperous by making the poor less poor. At the top of the scale there has likewise been a striking change. The enormous lead of the well-to-do in the economic race has been considerably reduced … for the really well-to-do and the rich, whom we might classify as the $16,000-and-over group, their share of the total national income, after taxes, had come down 13 per cent [in 1929] to 7 per cent.
The ethos was unwritten, but became known as management capitalism. It was the idea that businesses were run by, and prioritized towards, management and workers. The parallels between what we learned during the war and how we managed companies after the war didn’t leave much room for shareholders. Management were the generals. Workers were the soldiers. Who were shareholders? They were a vital but not particularly powerful class. The stock market did well in the three decades after the war as the economy hummed. But the pendulum of power swung sharply toward workers.
The era worked great, until it didn’t. Like most trends it eventually stretched farther than the economy and shareholders could bear. Unions at times flexed their muscles more than companies could stomach. By the late 1970s the tug-of-war between workers and shareholders had swung so far toward workers that investors were due a little more spotlight.
They got just that in 1976, when two economists wrote a paper called “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” It argued that businesses were full of bloat and inefficiency and would be run better if management acted like owners and aligned their incentives and priorities with shareholders. It became the most cited economics paper of all time, and began a movement toward profit maximization as the top priority of business.
That’s where we’ve been for the last 30 years.
The pendulum has swung in the opposite direction, from favoring labor to favoring investors. Corporate profits have risen from an average of 6% of GDP from 1950 to 1980 to more than 11% today. Median compensation has grown one-third as fast as GDP since 1980. From an extreme base of companies being run by and for workers 40 years ago, we’re now in an equally unsustainable world where many companies are run by and for the pleasure of shareholders. Millions of workers have had enough of it.
Big swings are a normal part of capitalism. We’ll always have them.
But each of these extremes highlights an iron rule of successful long-term businesses: There are multiple stakeholders in every company. Customers. Employees. Shareholders. Suppliers. Communities. Any sustainable business must acknowledge and nurture the needs of every one of those stakeholders, without preferring one dramatically more than others. Preference leads to extremes. And extremes don’t last long. This is more important than it’s ever been, since broader access to information means everyone can see what’s happening to everyone else.
Squeeze your employees and your shareholders will benefit … for a while. Squeeze your shareholders and your employees will benefit … for a while. Squeeze your suppliers and your margins will grow … for a while. Give away your product and your customers will love you … for a while.
Being part of a system that is fundamentally out of balance means you’re counting down the days until something breaks and hoping you can transition faster than the market leaves you behind. Which is a precarious position to be in.
Look at Wal-Mart, which for decades has been the posterchild of paying skimpy wages. What began as a system to maximize shareholder value eventually turned into the opposite, as employees were squeezed too hard. The New York Times wrote in 2013:
Walmart, the nation’s largest retailer and grocer, has cut so many employees that it no longer has enough workers to stock its shelves properly, according to some employees and industry analysts. Internal notes from a March meeting of top Walmart managers show the company grappling with low customer confidence in its produce and poor quality. “Lose Trust,” reads one note, “Don’t have items they are looking for — can’t find it.”
Good luck turning around from this. Trust, both from employees and customers, doesn’t offer many second chances.
Or take the recent Wells Fargo fiasco, where low-wage employees were given such impossible tasks that they faced two options: Cheat or be fired. Who does this benefit? The shareholders … for a while. Now it’s coming back to bite. One analyst thinks the bank will lose a third of its customers.
You should only get excited about the prospect of something that not only works, but works in harmony for everyone who is involved with it. That’s when something has the potential to win long term. And long term is when compounding really becomes powerful.
It’s not hard to run a business that favors one stakeholder, or even two, since exploiting is easier than serving. But companies that do find a way to take care of everyone who touches their product create something incredible.
Take Starbucks. For years it has offered health insurance – decent health insurance – to any employee working more than 20 hours a week. It’s a small token that makes a huge difference in employees’ lives, and one that competitors scoffed at long before the Affordable Care Act. Has the cost of insurance hurt Starbucks? It’s hard to say anything has hurt a company whose shares are up 18,000% in the last two decades. Starbucks has done well by making customers as happy as employees, who were as happy as shareholders who were as happy as suppliers. The whole system works.
Costco pays incredibly good wages relative to competitors. It has a $13-an-hour minimum wage, which is 30% above competitor Sam’s Club. It’s done this for years, which has reduced labor turnover so much that it remains competitive with high margins. Shareholders have not paid the price: Costco shares are up twenty-fold in the last two decades.
Same for Facebook, Google, Whole Foods, In-N-Out Burger, Trader Joe’s, and Kickstarter.
All of these companies have done something amazing. But the most underappreciated part of their success is the balance they’ve struck between the needs of customers, employees, and shareholders.
They’ve been pretty nice to everyone.
And it works.