John Wattles
Paper 2
March 30th, 2015
Costco and the Kantian Approach
Costco Wholesale Corporation is the largest warehouse retailer in the United
States. Founded in 1983 by James Sinegal and Jeffrey Brotman, Costco has grown
into an internationally recognized brand that has over 663 warehouses located in
the United States, Canada, United Kingdom, Mexico, Japan, Australia, and Spain. The
company offers member access to both branded and private-label products in a
wide range of merchandise categories such as food, hardlines, softlines, and fresh
food. Today, the company has annual revenues of roughly $112 billion, has an
average store size of 144,000 square feet, and enjoys a market capitalization of
$65.5 billion. However, given the company’s rapid growth and immense size, the
company only nets a profit margin of 1.8%(Gibson).
Given the nature of the industry, and a business model that operates on the
idea of low margin and high volume, Costco is not like any of its competitors. Costco
values human productivity and customer satisfaction. The company focuses a great
deal in rewarding their employees, participating in community service, and
operating in a way that is environmentally friendly. The company puts people ahead
of profits and as a result, has significantly outperformed the like of Wal-Mart, Kohl’s,
and Target. To quote the company’s mission statement: “Costco's mission is to
continually provide our members with quality goods and services at the lowest
possible prices. In order to achieve our mission we will conduct our business with
the following Code of Ethics in mind: Obey the law, take care of our members, take
care of our employees, and respect our vendors.” (Farfan) The company goes on to
say that they,” believe that ethical business creates profits” (Farfan).
As an ethical point, Costco follows many of the beliefs that were expressed by
Immanuel Kant of the late 18th century. Originally called deontology, but widely
known and accepted as Kantianism, Costco’s business operations are extremely
similar to the teachings of Kant. Throughout this paper, I will hope to prove that
many of the company’s actions adhere to the ethical ideas of Kant and how in turn,
their business model has actually benefited their bottom line and company
valuation.
To start, Costco values their employees. Wages start at an above average
industry level of $10 per hour, and quickly increases to $18.32 per hour. This also
excludes the twice-a-year bonus of $2000 and $3000 for the company’s top wage
earners of more than a year. (Cascio) These costs account for more than 70 percent
of the company’s total cost of operations, which is 40% higher than the industry
average (Cascio). Kant would argue at a fundamental level, that this strategy
exemplifies a business that is acting in their duty to sufficiently provide their
employees with free will. For Kant, any decision that is made should stem from the
ethics of duty rather than the ethics of consequences. In discussing Kantianism,
Norman Bowie writes, “Free will is what gives us our dignity and unconditioned
worth” (Bowie). Costco understands the value of their employees and has the
intention to promote happiness and empower their self-worth. In regards to their
high wages, Co-founder Sinegal says, “its just good business. You’ve got to want to
get the very best people that you can, and you want to be able to keep them and
provide some job security for them. That’s not just altruism, it’s good business”
(Cascio).
Kant would praise the ethical intentions of Costco. For him, Costco is fulfilling
his second formulation, which states, “Always treat the humanity in a person as an
end, and never as a means merely” (Bowie). If Costco was using their employees
simply as a means, then the company would not offer the wages that management
has enacted. The company would be much more focused on delivering strong profit
margins and growing their earnings per share. The company would not have the
industry’s lowest employee turnover rate of 17 percent and offer generous
promotional opportunities (Cascio). Costco has dedicated itself to promoting
internally for 86 percent of its openings in upper-level management positions. Kant
values the idea of democratizing the workplace and providing employees
meaningful work in which all can participate. For him, Costco has provided their
employees “Positive Freedom” (Bowie). Positive freedom is the freedom to develop
one’s human capacities. This means bluntly, to develop one’s rational and moral
capacity. Any act that is done to deceive or coerce someone is considered “negative
freedom” and has zero usage in ethics, let alone business.
Costco also exemplifies Kant’s principle that one human being cannot use
another simply to satisfy his or her own interests. In terms of CEO compensation,
one could make the argument that in today’s heavily unregulated environment,
CEO’s are reaping the benefits at an abusively unfair rate. Many of today’s CEOs of
large American companies make more than 430 times the pay of the average worker
(Cascio). In contrast, the CEO of Costco makes far less in base pay of only $350,000.
Of course, this number does not include stock options and other benefits, however
at a fundamental level, it shows that Costco’s executives do not have the intent to
put their own self-interests above those of their employees. For Kant, putting money
on par with employees is immoral, and it is clear that Costco has the intentions to
avoid just that.
Another topic that is worth noting is Costco’s dedication to giving back to the
community. Since 1988, Costco Wholesale Corporation has raised more than $100
million for children’s hospitals nationwide, through its partnership with the
Children’s Miracle Network. The company also partners with United Way,
Communities in Schools, and maintains its own Costco Scholarship Fund (JasperZellner). Charles Munger, the business partner of billionaire philanthropist Warren
Buffett, sits on the board of Costco and advocates for private investment over
charity. In an interview with Bloomberg, Munger says, “I believe Costco does more
for civilization than the Rockefeller Foundation…I think it’s a better place. You get a
bunch of very intelligent people sitting around trying to do good, I immediately get
kind of suspicious and squirm in my seat “(Frye). He goes on to say that capitalistic
ventures like Costco do more good than the “stupidity and folly” of organizations
like the World Bank (Frye).
Kant talks about this idea in the Metaphysics of Morals when he writes, “That
beneficence is a duty results from the fact that since our self-love cannot be
separated from our need to be loved by others, we thereby makes ourselves an end
for others… hence the happiness of others is an end which is at the same time a
duty” (Bowie). Bringing this idea back to business ethics, it would mean that Kant is
arguing that corporations exist because of the rules and actions of society, and that
there exists a moral obligation or duty for those corporations to give back. The most
interesting part of this language is that it is the same language used by Charles
Munger. At the end of the interview Munger says, “Those of us who have been very
fortunate have a duty to give back” (Frye). Costco believes in giving back to the
communities in which they serve and placing those efforts before profits to the
extent in which they do, is extremely honorable.
The last point I want to make about Costco fulfilling the principles of Kant
has to do with the company’s environmentally friendly operations. In 2014, Costco
began operating rooftop solar photovoltaic systems in 83 of their warehouses. This
effort helps to generate 72 million kWh of electricity per year (Gibson). A Kantian
ethicist would argue that these initiatives fulfill Kant’s first formulation in that one
must “act only on maxims which you can will to be universal laws of nature.”
(Bowie). No one can argue that if these actions were to be made universal law, that
it would be considered morally wrong or self-defeating. The world would rapidly
increase efforts towards the usage of sustainable energy and global warming would
become a non-factor.
That all being said, Costco’s decision to focus their time and resources
towards their people, society, and the environment has resulted in the company
having incredible financials. To put it in perspective, the graph below tracks the
stock price of Wal-Mart and Costco over the last five-years.
It is obvious that Costco has outperformed it closest competitor. Wallstreet has
found the value in Costco’s business model and the company is being rewarded for
it. Unfortunately however, Wallstreet did not always have that view. Many analysts
insisted that Costco’s corporate strategy would hurt shareholders. As explained by
Deutsche Bank Securities Inc. analyst Bill Dreher, “At Costco, it’s better to be an
employee or a customer than a shareholder.” (Bowie) Likewise, in the wake of
surging healthcare costs and Costco’s decision to only increase employee
contribution from 4 to 8 percent, when the industry average was 25 percent, Dreher
again noted the impact that would have on shareholders. He says, “From the
perspective of investors, Costco’s benefits are overly generous. Public companies
need to care for shareholders first.” (Bowie) These comments were made in 2004
when Costco’s stock price was hovering between $35-40. If Mr. Dreher would have
invested then, and held his common stock until today, he would roughly have a 300
percent return. It’s clear that the argument that Costco would not be able to control
their operating costs never came to fruition.
Overtime Costco’s business strategy has actually saved the company money
and contributed to their bottom line. For example, by having industry leading
employee turnover ratios, Costco has saved significant costs in separation,
replacement, and training of their employees. On average, Costco only spends
$243.81 million in employee turnover costs. Compare that to Wal-Mart’s Sam’s Club
of $611.77 million, and the practice of maintaining happy and productive workers
makes sense (Cascio). In addition to this, Costco’s initiative to provide healthcare
insurance to 85 percent and retirement benefits to 91 percent of their employees
has actually made the company more money. For example, in 2005, Costco did
$43.05 billion in U.S. sales with 38% fewer employees then their competitor Sam’s
Club, which only had $37.1 billion in U.S. sales (Cascio). That means that each
employee as Costco generated 49% more operating profit per hour than Sam’s
Club’s employees. This is a testament to Costco’s ability to maintain happy and
productive workers, which contributes to their low employee turnover ratio.
For Kant, he would argue that Costco’s financial success is a result of the
company acting in their duty to do society good. Having said that, he would even
argue that a corporation has a moral obligation to focus on profits and return value
to their shareholders. As noted by Bowie, Kant would argue that not all decisions
that are made by a company must be of purity and possess a strictly moral motive. If
Costco were to decrease their hourly wages by $2 because the company would not
be able to pay their interest payments and that contract exists, then the act could be
considered moral as well. However, Kant would also argue the strategy that Costco
has undertaken in that perhaps their profits have been enhanced even without
solely focusing on the bottom line. To quote Bowie, “perhaps profits will be
enhanced if the manager focuses on respecting the humanity in the person of all the
corporate stakeholders. Perhaps we should view profits as a consequence of good
business practices rather than as the goal of business.” (Bowie).
Costco’s ethical business practices should be universal. They are not only
beneficial to the company, but to each stakeholder as well. Managers and Kantians
should view Costco as an example of theory Y, in that as a self-fulfilling prophecy,
Costco’s behavior will become an example of what doing good for society can do. For
Kant, that would mean a world in which the free will of people becomes undeniable,
and that in turn will lead to the development of unconditional self-worth and moral
capacity (Bowie). Not to mention higher profits as well.
(Below shows a comparison between Costco (Left) and Wal-Mart (Right))
Works Cited:
Bowie, Norman. “A Kantian Approach to Business Ethics.” Web. 26 Mar. 2015
Cascio, Wayne. "Decency Means More than "Always Low Prices": A Comparison of
Costco to Wal-Mart's Sam's Club." Academy of Management Perspectives: 26-36.
Print.
Farfan, Barbara. "Costco Wholesale Mission Statement - Profits and Prices Revolve
Around Ethics." About.com. Web. 25 Mar. 2014.
http://retailindustry.about.com/od/retailbestpractices/ig/Company-MissionStatements/Costco-Stores-Mission-Statement.htm
Frye, Andrew. "Munger Says Costco Beats Charity as Buffett Signs Up Donors."
Bloomberg.com. 17 Sept. 2010. Web. 27 Mar. 2015.
<http://www.bloomberg.com/news/articles/2010-09-17/berkshire-s-mungersays-costco-beats-charity-as-buffett-signs-up-donors>.
Gibson, Rachel. Costco Wholesale Corporation. Nattick, 2015. Print.
Jasper-Zellner, Patricia. "Costco Wholesale." Children's National Heath Site. Web. 26
Mar. 2015.
<http://chfdc.convio.net/site/PageServer?pagename=corporate_costco>.