Customers, Employees Or Shareholders First?

Before getting into a bus, you have to know the bus number. It is no point blaming the busdriver, but yourself, in case you take the wrong bus. Investing in a company, one should know where the management is leading the company to. It is out of question, some may wonder. In Economics 101, all companies are after profits and hence maximize shareholders' returns. That's all they are all about, isn't it? Take a look at the mission statement of some successful companies. Those statements may disappoint shareholders at the first glance.

A mission statement declares the business objectives and philosophy of a company. It is usually available on the company's website.

Many mission statements carry multiple aims. Bookstore chain Barnes & Noble's Mission Statement said: "Our mission is to operate the best speicalty retail business in America, regardless of the product we sell.... Above all, we expect to be a credit to the communities we serve, a valuable resource to our customers, and a place where our dedicated booksellers can grow and prosper. Toward this end we will not only listen to our customers and booksellers but embrace the idea that the Company is at their service."

This publicly listed company doesn't mention such words as shareholders, returns and profits in its mission statement. Instead, it vows to take the interests of customers and publishers as the top priorities. Does it make any sense for you to invest in such a benevolent company?

Successful companies do not regard making profit as the ultimate goal. Coffeeshop chain Starbucks promises to: "Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow." The six principles are as followed:

1. Provide a great work environment and treat each other with respect and dignity.
2. Embrace diversity as an essential component in the way we do business.
3. Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.
4. Develop enthusiastically satisfied customers all of the time.
5. Contribute positively to our communities and our environment.
6. Recognize that profitability is essential to our future success.

Profitability is mentioned in the last principle. However, Starbucks does not regard profitability as the ultimate goal, but a tool to bring "future success". By success it can mean anything from high reputation, to sales volume to global penetration to share price.

Are these mission statements just shrewd marketing? i don't think so. Companies do lots of different things trying to look good, nowadays. For instance, Starbucks starts selling bottled water, under its own Ethos brand. It will donate 50 US cents for every US$1.8 bottle of water sold to fund drinking water projects in poor countries. That is surely marketing. The costs involved are very limited, and it won't hurt the core business even if the new water business turns out to be a complete failure.

But if a company make a public statement on mission, it will do whatever it can to achieve the goals. It will utilize all the resources and make all the key decisions accordingly. At least, that is what it pledges to do. The statement also projects a vision for the company's shareholders, customers and employees.

For sure, none of these successful companies want to say something stupid or completely nonsense in the mission statement. Why don't they simply put "shareholders' interests" as the top priority?

HSBC (5) is a rare example that a successful company points straightly to shareholders' returns as the primary goal. It says in an official statement: "Our governing objective is to provide a satisfactory return on our shareholders’ capital."

Manulife (945) doesn't seem to have its shareholders in its mind, at least not on its lips. This long-time outperformer states that its vision is "to be the most professional life insurance company in the world: providing the very best financial protection and investment management services tailored to customers in every market where we do business." The values, which "guide everything we do - from strategic planning to day-to-day decision-making, to the manner in which we treat our customers and other stakeholders", are professionalism, real value to customers, integrity, demonstrated financial strength and employer of choice."

The insurer elaborates that the "demonstrated financial strength" is to serve its customers, instead of shareholders, ensuring that it is always able to settle claims.

The Ritz-Carlton Hotel has the best motto i have ever seen: "We are ladies and gentlemen serving ladies and gentlemen." The luxurious hotel chain aims to be "a place where the genuine care and comfort of our guests is our highest mission." Again, it takes pride of its quality services rather than profitability.

Hewlette Packard's former chief executive John Young said, cited in Build to Last: "Maximizing shareholder wealth has always been way down the list [of objectives]. Yes, profit is a cornerstone of what we do... but it has never been the point in and of itself....If we provide real satisfaction to real customers -- we will be profitable."

In her column, Cathy Holcombe, the "muckraking modeler", has raised a valuable question: Should we invest in those evil companies which exploit employees and make their lives hell? Investors are tempted to reckon: That should be positive to shareholders. Why not, as long as it make the highest possible profits?

My answer is negative. It is not because of morality, but because those companies are unlikely to succeed without dedicated, and happy, employees. On the other hand, customers' satisfaction is a key to profitability.

Treating customers and employees well, profits will come as a likely consequence. You can have your cake and eat it. Therefore, i think those mission statements that play down shareholders' interests are really sensible. Those companies focus on the process of profit-making, instead of the results.

A business is not necessarily a zero-sum game for owners, employees and customers to battle. A good business adds value while a bad one destroys value. Look at PCCW (8). Both its shareholders and employees have been unhappy for the past few years. However, few shareholders have ever complained about the huge salaries and bonuses Hutchison Whampoa (13) paid its managing director Canning Fok.

A company treats its customers and employees well. The next question is: Should a company take responsibilities to take care of a broader scope of people in the society? See you next time.


Disclosure of interest: i am holding shares of HSBC and Manulife.
Aug 11, 2005
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