- The Power of Love
- What Is a Firm of Endearment?
- FoE Stakeholders
- Identifying the Original Firms of Endearment
- Firms of Endearment vs. Good to Great Companies
- Selecting Companies for the Second Edition
- The Unspoken Contract That FoEs Honor
- The FoE Way
This chapter is from the book
This chapter is from the book
This chapter is from the book
Identifying the Original Firms of Endearment
Most studies of corporate exceptionalism (or “greatness,” to use Jim Collins’ term) start with financial performance and work backward to identify the causes or covariates. We started with humanistic performance—meeting the needs of stakeholders other than shareholders—and worked forward.
We described the process for identifying firms for the first edition of this book as “organic and analog.” We were interested in identifying a representative sample of firms that met our humanistic criteria. We did not simply conduct a statistical analysis of a plethora of companies in search of those whose financial performance supported the FoE hypothesis that companies can do well while doing good. Also, we did not want to exclude private companies from our analysis, as we believe that some of the best-managed companies from a stakeholder perspective are privately owned.
What we did was ask people, “Tell us about some companies you love. Not just like, but love.” This process generated hundreds of candidate companies, many that are household names and many that we had never heard of. We then put them through a screening process that assessed the quantitative and qualitative performance of each company for each of the SPICE stakeholders. We also probed for vulnerabilities, asking questions such as the following: Would most people say that the world is a better place because this company exists? How extensive a track record have they built? Do they have intensely loyal customers? How well do they treat their part-time employees? How high is their employee turnover? Do they have a reputation for squeezing their suppliers? Do communities welcome them or oppose them when they try to enter or expand? Do they have a record of environmental violations? Do they follow uniformly high standards of conduct worldwide? How have they responded to industry downturns or crises of confidence?
We picked the most promising 60 or so of the companies that bubbled up through our exploratory research and assigned teams of MBA students to research them. We directed the teams to conduct secondary and primary research (through interviews with executives, employees, customers, and others) on the companies, covering all major stakeholder groups: customers, employees, suppliers, communities, governments, and investors. When each project was completed by its assigned team, the results were assessed by the other research teams to gauge the extent to which a company qualified as a company loved by its stakeholders (that is, was qualified to be called a firm of endearment). The projects were completed over a two-year period. Some companies were investigated multiple times. In the end, we picked 28 companies, of which 18 were publicly traded.
We understood, of course, that none of these companies is perfect; each has areas in which it is relatively weak or somewhat vulnerable. Generally, these weaknesses are confined to one or at most two stakeholder groups. On the whole, however, we judged these companies to be quite exemplary in significant ways. Once we had selected the 28 companies we felt best manifested a high standard of humanistic performance, we then conducted a detailed comparative analysis of the firms from an investor viewpoint. Our hypothesis at this stage was that these companies probably performed better than the “average” company, but generally not by a huge amount. After all, they pay their employees exceptionally well, do not squeeze their suppliers, deliver great products and experiences at fair prices to customers, are conscious of their environmental impact, and spend significant resources in the community—surely, all this should lead to a reduction in profits and thus the stock price. As we are constantly reminded, there is no free lunch, certainly not in the corporate world.
Imagine our surprise, then, when we completed our investor analysis. These widely loved companies (those that are publicly traded) outperformed the S&P 500 by huge margins, over ten-, five-, and three-year time horizons. In fact, the public FoEs returned 1,026 percent for investors over the ten years ending June 30, 2006, compared to 122 percent for the S&P 500; that’s more than an 8-to-1 ratio!
If this is not a “feel good” story, we don’t know what is. In fact, it is far more than a feel good story—it is a deeply inspirational one. Apparently, these companies have figured out that not only can you have your cake and eat it too, you can also give some to your friends, donate some to a soup kitchen, and help support the local culinary school. How is it that these companies can be so generous to everyone who costs them money (customers, employees, suppliers, communities) and still deliver superior (some would say spectacular) returns to investors? The answer to that important question is what this book is all about.