Costco capitalism

I came across this blog post by Bryan Lehrer titled “Costco Capitalism” which I think offers an interesting variation on the discussion of companies seeking to do good, or even better, to “be” good.

It poses two questions:

  • whether some companies are built on “structurally fair” foundations that make it easier for them to be perceived as “good” or “fair” companies; and
  • what exactly does it mean to be an “ethical” company

This extract will give you a flavour of the author’s analysis of the Costco business model

Sustainable Capitalism? – What Costco shows us about the blurry relationship between ethical and fair

Costco shows that … simply providing your customers the feeling that they aren’t getting ripped off, and doing so in a way that matches mainstream views of acceptable externalities, is all that is required for success. If this sounds reductive, it’s because it is. The key to Costco’s success is just how straightforward the alignment of stakeholders within its business model are.

That being said, there are externalities associated with Costco’s business model, even if they aren’t viewed by the mainstream as such. The main thing here is a retail model that promotes rampant consumption, and the fallout from this which includes broad waste and sustainability concerns. Interestingly, because of Costco’s large purchasing power, dominance over its supply chains, and upper-middle class income of its shoppers, it generally has more progressive product standards than other retail brands in comparable price tiers.

Costco Capitalism, Bryan Lehrer

Lehrer argues that the foundation is to provide customers with “the feeling that they aren’t getting ripped off thereby building that elusive intangible asset of Trust that many companies routinely include in their statement of corporate values (e.g. “a Trusted Partner”). However, equally important is that the company can do this “in a way that matches mainstream views of acceptable externalities.

This qualification regarding externalities is the interesting part.

Other companies may have a credible claim to being able to provide a good or service cheaply but the often unasked question is what is the full cost of the good or service; i.e. is the low cost at the company/consumer level based on paying workers a subsistence wage with uncertain working hours, or reliance on an external supply chain with dubious environmental and labour standards. Lehrer notes that Costco could be vulnerable to criticism on a number of fronts (e.g. its business is, at its heart, a mass consumption model) but Costco is protected by virtue of adopting a position which fits community standards. Costco can afford to spend some of its efficiency dividend on progressive product standards but it is not necessarily pushing the boundaries of what might be done because it is also sensitive to what its customers are willing to pay for being good.

This framework (i.e. is our business built on an operating model that is structurally fair) offers a useful perspective when thinking about financial services companies. Initiatives such as the Bankers’ Oath have a contribution to make in addressing the cultural issues in banking but I suspect that there is as much value (potentially more) in exploring the structural features of the industry that create the pressure to cut corners in the pursuit of financial targets.

I don’t expect anyone will change their mind about bankers and banking in general on the basis of this post. I do hope to make the point that there are subtle structural challenges in banking that complicate the capacity to do good. Developing a better understanding of the structural issues is I think essential to crafting a lasting solution to the cultural issues. I don’t have any neat answers but I do feel that the issues covered in Bryan Lehrer’s analysis of Costco offer some insights.

Tony – From the Outside

Constructive dissent

I am currently reading “Thinking in Bets” by Annie Duke. It is early days but I suspect that this is a book that has some useful things to say about creating the kinds of corporate culture that truely reflect the values espoused in corporate mission statements. It is a truth that actions speak louder than words and she cites a practice employed by the American Foreign Service Association which has not one but four awards for employees who have exhibited behaviours that demonstrate initiative, integrity, intellectual courage and constructive dissent.

The attached quote comes from the AFSA website setting out the criteria employed for these awards

Criteria for the Dissent Awards

The awards are for Foreign Service employees who have “exhibited extraordinary accomplishment involving initiative, integrity, intellectual courage and constructive dissent”. The awards publicly recognize individuals who have demonstrated the intellectual courage to challenge the system from within, to question the status quo and take a stand, no matter the sensitivity of the issue or the consequences of their actions. The issue does not have to be related to foreign policy. It can involve a management issue, consular policy, or, in the case of the recently established F. Allen “Tex” Harris Award, the willingness of a Foreign Service Specialist to take an unpopular stand, to go out on a limb, or to stick his/her neck out in a way that involves some risk

Who gets the money?

Matt Levine’s “Money Stuff” column (23 April 2020) has some interesting observations commenting on which bank customers received the money the U.S. government made available under its Paycheck Protection Program. The column’s headline focus is developments in the oil market, which is worth reading in its own right, but the bank commentary is further down under the subheading “PPP”.

You can find the column here but there are a couple of extracts below that give you the basic thrust of his comments …

The U.S. government is distributing free money to small businesses so that they can stay afloat, and keep paying workers, during the coronavirus shutdown. It is doing this through the Paycheck Protection Program, in which banks lend the money to small businesses, and then the government (the U.S. Small Business Administration) pays back the loans if the businesses use the money for payroll. This is, broadly speaking, sensible. I once wrote about it:

It is a public-private partnership that plays to each side’s strengths. Banks are, precisely, in the business of vetting applications from local restaurants, examining their financial records and deciding how much money they need. The government, meanwhile, is best equipped to generate magical quantities of money. The banks do something recognizably bank-like—market and underwrite small-business loans—and the government transforms them into magical free money.

Matt Levine, Bloomberg “Money Stuff” column, 23 April 2020

Matt goes on to offer his perspective on the strengths of the program, some of the practical issues of execution but also its potential unintended outcomes

That’s the idea. But if you are enlisting banks to run your program, you are going to get … banks. Like, the banks are going to behave in recognizably bank-like ways while they are doing the bank-like job of handing out the loans. Some of that will be good: You want the banks to check that the small businesses exist and aren’t stealing the money and so forth. Some of it will be good-ish, or debatable: You want the banks to check that the documents are all in order and that the loans match the businesses’ actual financial needs, but you don’t want them to spend so much time checking that the businesses never get their money.

And some of it will be … not exactly bad, necessarily, but at least unrelated to the goals of the program.

I don’t have any insight on whether these big American banks are guilty as charged, or indeed guilty at all. Matt is I think open minded and simply presenting the facts but it is something worth watching as the COVID 19 crisis plays out. As a general observation, I feel like the Australian banks have for the most part made extra (if not extraordinary) efforts to do the right thing by both their customers and the community at large. I am of course a (now semi retired) banker so that colours my observation but, as an ongoing bank shareholder, I expect to be feeling some of the impact of the forbearance in upcoming dividend payments and see that as part of the price of investing in banks.

Tony (From the Outside)

Building applied critical thinking into the structure of an organisation

This article in Bloomberg caught my attention. It is a background piece on a team known as the “Applied Critical Thinking” unit that has been operating inside the New York Federal Reserve since 2016.

The general idea of contrarian thinking and recognising the limitations of what is and is not knowable are not huge innovations in themselves. What was interesting for me is the extent to which this unit can be thought of as a way of building that thought process into the structure of organisations that might otherwise tend towards consensus and groupthink built on simple certainties.

I have touched on this general topic in some previous posts. A review of Paul Wilmott and David Orrell’s book (The Money Formula), for example, discussed their use of the idea of a “Zone of Validity” to define the boundaries of what quantitative modelling could reveal about the financial system. Pixar (the digital animation company) also has some interesting examples of how a culture of candour and speaking truth to power can be built into the structure of an organisation rather than relying on slogans that people be brave or have courage.

I don’t have all the answers but this initiative by the NY Fed is I think worth watching. Something like this seem to me to have the potential to help address some of the culture problems that have undermined trust in large companies (it is not just the banks) and the financial system as a whole.