Reference no: EM131916308

Problem: Shareholder Approach

Stakeholder theory and corporate social performance have gained great credibility with academics and many managers. Others, however, argue that profits and shareholders must remain the consuming concerns of management, and that a skilled focus on the bottom line will, incidentally but inevitably, result in the greatest good for society. That is, the company that maximizes its profits necessarily does not only what is best for its shareholders but also what is best for society generally. The shareholder/ stakeholder debate is well illustrated by the heated competition between massive retailers Walmart and Costco. Each week Walmart saves money for millions of Americans by its relentless focus on the bottom line and hence on the interests of its shareholders. Costco, on the other hand, has drawn great praise from management scholars for its close attention to worker welfare. Costco workers average just under $21 per hour while Walmart pay averages about $13 per hour for full-time employees; over half of those workers earn less than $25,000 annually.110

About 88 percent of Costco workers have company-sponsored health insurance, whereas Walmart reports "more than half " of its workers have company plans.111 Costco's employee turnover is about 24 percent versus about 37 percent for Walmart.112 Both companies have generally been performing well in the stock market during the recent economic uptick, and both are showing earnings gains, although Costco's recent sales growth has exceeded Walmart's.113 Walmart has maintained a strong stock market position, in part, by relentless cost cutting, but some observers see problems in that approach. Although Walmart added 455 U.S. stores in the past five years, its total U.S. workforce declined by 1.4 percent, a boost in operating efficiency but one that may be hurting customer satisfaction. Walmart has ranked last or tied for last among department and discount stores in the American Customer Satisfaction Index for the past six years.114 Nonetheless, Walmart's tough, bottom-line, shareholder focus continues to generate remarkable results for the world's largest corporation.

Critics Walmart, the target of relentless criticism, is accused of widespread sex discrimination and failure to pay legally mandated overtime. (Costco has faced similar problems.) Entire communities have banished Walmart's big boxes. Walmart is dealing with a bribery scandal in Mexico (see Chapter 2). In response to these public relations shortcomings, Walmart has initiated new sustainable, green practices including slashing solid waste and greenhouse-gas emissions and significantly reducing energy consumption. Those efforts are part of a larger "good works" and public relations campaign that includes food donations and support for a universal health care policy in America. Walmart also points to its success in providing economic opportunities for its massive and often modestly educated workforce, 61 percent of whom are women and 32 percent minorities.115 Walmart's big contribution, however, is in saving money for all Americans: an estimated $30 billion per year, or the equivalent of $270 per American family.116 Clearly, Walmart has felt harsh, market-based pressure to respond to social issues, but its shareholder orientation is intact and remains a strategic contrast to Costco's stakeholder approach.

Questions

1. Retired Costco CEO James Sinegal says high employee pay makes for good business. How can that be so?

2. Professor William Beaver writes, "And what of the stakeholder model? Beyond generating some academic interest, perhaps the best that can be said is that although corporations will not be unmindful of their other stakeholders, the latter's concerns will remain a distant second to those holding the share."117 Will shareholders or other stakeholders dominate corporate thought in the coming years? Explain.

3. In 1999, Bob Thompson sold his road-building firm for $422 million. Then he divided $128 million among his 550 workers, more than 80 of whom became millionaires. Thompson explained his generosity by saying, "I wanted to go out a winner, and I wanted to go out doing the right thing."118

a. Which management strategy, Walmart's low wages or Thompson's bonuses, is the more socially responsible? Explain.

b. Can Walmart, a publicly traded company owned by its shareholders, practice the same kind of generosity to employees that Thompson followed in distributing money that was literally his own? Explain.

c. Stanford professor Jeffrey Pfeffer reflecting on the bonus strategy: "It's how you look at your workforce. When I look at you, do I see a cost or do I see you as the only thing that separates me from my competition?"119 Comment.

d. Do you agree with Thompson that he did the "right thing"? Explain.