Conscious Capitalism

Doing Good While Doing Well Asian Institute of Management February 23, 2011

Dr. Ralph Z. Sorenson

In the U.S. We Live In In Era of Public Distrust Of Capitalism & Corporations

Daily headlines citing tales of greedy, corrupt CEOs & senior executives of major public companies

The American Rogues Gallery Of Corruption

Bernie Ebbers of WorldCom John Rigas & Son of Adelphi Dennis Kozlowski of Tyco Martha Stewart of Martha Stewart, Inc. Richard Scrushy of Health South Michael Milken of Drexel Burnham Ken Lay, Jeff Skilling & Andrew Fastow of Enron Bernie Madoff Raj Rajaratnam, Galleon Group Alllen Stanford and others

Stories of Bloated Executive Compensation

Gordon Gecko: Greed is Good!

You cant take it with you but perhaps you can eat it !!

Governance Also Being Criticized:

Some boards of directors are accused of: Incompetence Being rubber stamp cronies Illegal trading in companys stock Back-dating of stock options Being over-compensated for board service Providing inadequate oversight over financial reporting, corporate controls, risk taking, and executive compensation Having unhealthy interlocking directorships

Interlocking Directorships

The Media Are Having a Field Day Targeting The Corrupt Capitalist System
UN Attacks Capitalism (UNCTAD Study) 6 Charged in Vast Insider-Trading Ring (WSJ) Outrageous CEO Salaries Are Nationwide Scandal Where Are The Politicians? Obscene & Excessive Lou Dobbs on CE0 Compensation vs. Minimum Wage; CNN News Gallup Poll: Widespread Dissatisfaction With Free Market

In short, Main Street is at war with Wall Street and much of the corporate community !

Sadly, much of the criticism is justified !

Result: Growing efforts on the part of U.S. government to try to legislate honesty, integrity, and morality

Many new laws, regulations, and interventions into the private sector

Examples
Foreign Corrupt Practices Act Sarbanes-Oxley legislation Banking and financial services interventions Strings attached to TARP and bailout programs Compensation controls Government takeover of General Motors Health care reform legislation Financial reform legislation .and many others

The Big Question in the U.S.: (and the rest of the world)
Is it possible to retain free-market capitalism as a powerful positive force for creating jobs, innovation, and economic well-being while making it more responsive to the interests of all stakeholders, not just shareholders ?? OR Are we destined to see ever-increasing government involvement & intervention in the workings of the private sector ??

But there is another side to the story!

Some Examples of Companies That Appear to be Doing Good While Doing Well*
Amazon CarMax Caterpillar Commerce Bank Container Store Costco eBay Google Harley-Davidson Honda IKEA JetBlue Johnson & Johnson Jordans Furniture L.L.Bean New Balance Patagonia REI Southwest Starbucks Timberland Toyota Trader Joes UPS Wegmans Whole Foods

* Courtesy of Firms of Endearment; Sisodia, Sheth, & Wolfe; Wharton School Publishing; 2007; page 16

LETS TAKE A CLOSER LOOK AT THE LAST OF THESE COMPANIES: WHOLE FOODS MARKET
Why do I single out Whole Foods Market? Simply because, being a director of the company, I know it well and because I believe it represents a unique approach to management and governance that is well worth emulating and that could represent the wave of the future for corporations and other entrepreneurial enterprises
in the U.S. and around the world

Whole Foods Market:

Whole Foods has been the fastest growing & most profitable publicly owned food retailer in the U.S. in the last 10 years

It focuses on selling high quality natural & organic food Current annual sales are in the $9 - $10 billion range 305 stores in U.S., Canada, & England ~ 57,000 team members all non-union

13 years on Fortune list of 100 best places to work!

WHOLE FOODS MARKET (CONTINUED)

Same store sales growth has averaged 9% over last 15 years EBITDA CAGR of 30% since IPO in 1992 WFM ranks 284 on the current Fortune 500 list Market capitalization is in $10 billion range Stock price is in the $60 range; PE Multiple: 35 - 40 !

$100k invested in 1992 IPO now worth ~$1.5 M; 1500% gain !

In short, Whole Foods has been an extraordinary success story by almost any standard of measurement

What lies behind this success?

Whole Foods calls its management approach:

CONSCIOUS CAPITALISIM
A New Business Paradigm?

Lets start with the tone at the top, beginning with executive compensation in America

Executive Compensation
Average large public company CEO is paid 300-400 times as much as the average company employee !!! At Whole Foods total cash compensation is capped at 19 times that of the average team member. In 2010 the salary and cash bonus cap was $652,400 far less cash compensation than senior executives earn in comparable public companies.

But what about equity compensation?

Stock Options
Whole Foods does make use of stock option grants. But 93% of grants go to non-executive team members, the vast majority of whom work in the grocery stores. Meanwhile the top 5 executives in the company, including the CEO receive identical stock option grants. In 2008, these grants were each valued in the proxy statement at roughly $150,000 extremely modest by Fortune 500 standards. Just in case you were wondering, John Mackey, founder of the company, owns less than 1% of company stock.

The Distribution of Options

Estimated distribution of options at Fortune 500 firms as of 2005 Distribution of WFM options granted as of 2005
Top 16 Execs 7%

All Others 25% Top 5 Execs 75% All Others 93%

Data Source: Profits with Principles

And , by the way, in 2006 John Mackey decided he no longer wanted to work for money and he now works for a salary of $1.00 a year and donates all of the stock option grants for which he is eligible to the Whole Planet Foundation!

Senior executives have no other perks

 All team leaders receive same discounts and health benefits as all other team members All fly economy class & stay in modest hotels No company cars or drivers No club memberships Per capita dollar cap on what can be spent on business meals, with any excess coming out of the individuals pockets

Other Examples of Tone at the Top

1. 2.

CEO-inspired culture of shared fate We dont cut corners: commitment to honesty and integrity starting at the top Deep & fundamental respect for all team members Belief in giving all team members considerable responsibility and authority Total internal transparency re: company-wide compensation, store and department performance, operational policies

3. 4.

5.

Tone at the Top Examples (Continued):

6. New team members are approved by their peers, not their team leaders 7. Company-wide practice of promotion from within 8. All team members vote on their benefits 9. Non-union shared fate philosophy makes unions unnecessary 10. INNERVIEWS team member written magazine

LESSON TO BE LEARNED:
Tone at the top really matters!
Whole Foods compensation policies and egalitarian management practices engender a tremendous sense of trust in management among team members throughout the company!!! WE ARE ALL TRULY ON THE SAME TEAM

The 3 Pillars of Conscious Capitalism

1) Enterprises that are primarily driven by their mission and their sense of purpose Committed not solely to maximizing profits to shareholders, but rather to optimizing returns to all stakeholders: - customers - employees - partners - investors - communities - environment Led by purpose and mission driven servant leaders & entrepreneurs..(often founders of the company)

2)

3)

The Whole Foods Market Business Model: Holistic Interdependence

Whole Foods Core Values:

Core Value #1: Mission To sell the highest quality, delicious natural and organic foods possible and, in the process, help change for the better the way people eat and the way agriculture is practiced

Core Value #2: Satisfying & Delighting Whole Foods Customers

Most important stakeholder No customers, no business Customers are treated as ends not means Team members empowered to wow & delight customers
Happy Team Members = Happy Customers = Happy Investors

The Culture Captured in a Sign:

Team Members Did you know that you are Empowered to WOW Customers At any & every opportunity?
What does this mean? Whenever you are not sure how to handle the needs of a customer, you have the authority as a team member to make a decision and exceed that customers expectations. You can discuss the situation afterwards with leadership and maybe come up with a better solution, but there is no wrong decision when the customer leaves HAPPY AND WOWED! Customer service is where we stand head & shoulders above the competition and it is because of you!

#3: Team Member Happiness &

Excellence
Team Members are the next most important stakeholders Relationship among team members is based on trust engendered by tone at the top, transparency, genuine caring Importance of shared purpose + empowerment + a conscious rejection of command & control management Fair pay and attractive benefits Great place to work (13 years on Fortune 100 List)

#4: Win-Win Partnerships with Suppliers

The leading retail outlet for the enormous growth of natural & organic food in the last 30 years Success not possible without dedicated supplier-partners WFMs success has helped these supplier-partners to grow and flourish and they, in turn, have helped WFM flourish a win-win for all Strong competitors have also helped!!

Only after talking about the above top four core values does John Mackey (CEO & founder) go on to talk about shareholder value. Core Value # 5: To provide attractive returns to investors through profits and growth

The reasoning: If the company has happy team members who, with the support of its suppliers, delight customers by offering them delicious natural and organic food along with world-class service, it follows as night the day, that shareholders, in the long run, will also be delighted and well rewarded.

And, for the most part, they have been !

# 5: Providing Investors with attractive returns through profits and growth

Shareholder are the owners of the company Their role is to provide capital for innovation and growth Managers and employees are stewards of that capital Profit: the end result of optimizing gains for other stakeholders, not a goal in & of itself Profits, in turn, create wealth & prosperity for shareholders

Whole Foods has two additional Core Values

#6 To care about communities, the environment, and the humane treatment of animals. #7 To promote the health of all stakeholders through healthy eating education.

Commitment to Communities:
Philosophy: Corporate philanthropy because it is good business and because it is the right thing to do! Overall Policy: 5% of net profits are donated to charities

Policy in place for 20 years, since first mission statement was drafted Local store level 5% days (5% of sales contributed to local non-profits) Donation of day-end perishable food to community food-share organizations Contributions in natural disasters: e.g. Katrina Whole Planet Foundation: Partnership with Grameen Bank & Muhammed Yunis Micro Loans in developing countries

Where Whole Planet Foundation Currently Works

Loans used for:
Agriculture & livestock Indigenous handicrafts Corner Stores Prepared Foods

Costa Rica Nicaragua Mexico

Guatemala, Honduras, Columbia, Peru Queens--NY Nepal India East Timor Indonesia Kenya Ethiopia 98% women 55,000+ Members $10+M loaned out 98% Repayment

Leader In Environmental Stewardship

The only Fortune 500 company to purchase enough wind energy credits to offset 100% of its electricity use: 750 megawatts/yr Two-time winner of the EPAs Green Power Partner of the Year award. Solar power in 20 stores & growing 3 stores powered by hydrogen fuel cells with more to come

Commitment to the Environment:

Extensive re-cycling program; no plastic shopping bags Extensive use of re-cycled and re-usable materials Attempting to minimize packaging materials, green its trucking fleet & warehouse operations Extensive program of working with organic farmers and vendors both in U.S. and in developing countries $10 million loan fund to support organic farming Leader in promulgating FDA standards for organic and natural food & for truth in labeling Active program to oppose use of GMOs

Core Value # 7: Promoting the Health of Stakeholders Through Healthy Eating Education

Unhealty Eating and Health Care

Promoting the Health of Stakeholders Through Healthy Eating Education

GOAL: Combat obesity & promote better health for everyone through healthier nutrition. Recently formed partnership with Chef Ann Cooper to create thelunchbox.org, a Web site that features practical tips on how to improve the state of school lunches. Launching Customer Wellness Clubs where customers can learn more about developing healthier, more nutritious eating habits the ANDI INDEX. Adding in-store nutritionists New internal programs to incent team members to improve their health. (The healthier you are, the greater your in-store discount!)

Summary
Shareholders are served best when returns are optimized for all stakeholders: customers employees partners investors communities environment government

In the long run, it is better to be mission driven, than profit driven Profits = an end result, not a goal in and of themselves

Summary (Continued)
Believing in the mission of the company counts ! The tone at the top counts ! Leadership counts ! (servant leaders more successful in the long run than command & control leaders) Culture counts !

Companies can do good while doing well !

Conscious Capitalism:
Putting the enlightened back into the concept of enlightened self-interest

At Whole Foods and the foregoing companies Conscious Capitalism appears to be working QUERY: Can it work in other Companies & Organizations?