Investors Love Firms of Endearment

According to T. J. Rodgers, CEO of Cypress Semiconductor, a shameless Marxist runs whole Foods. Rodgers made this charge in a spirited debate in the October issue of Reason in which he and Nobel laureate (economics) Milton Friedman opposed Whole Foods CEO John Mackey in an argument over the role that corporations should be playing in addressing social issues – the so called social responsibility (CSR) issue.

Whole Foods is one of the companies we profile in Firms of Endearment. Rodgers is bitterly opposed to any idea that challenges Friedman’s famous edict that the only social responsibility of a company is to make a profit for its owners within legal bounds.

Rodgers lashed out at Mackey, “I resent the fact that Mackey’s philosophy demeans me as an egocentric child because I have refused on moral grounds to embrace the philosophies of collectivism and altruism that have caused so much human misery, however tempting the sales pitch sounds.”

We expect harsh criticisms of the FoE concept by the likes of T. J. Rodgers when the book appears next spring. Some people simply cannot get their arms around the idea that a CEO’s commitment to the FoE business model, which puts a company on the ideological path of doing well while doing good, is fair to stockholders.

A commonly heard argument against committing corporate resources to social needs is that it is a matter that is best left to stockholders doing so with the money they earn from their investment. Management has no business spending money on anything not directly related to producing profits for shareholders.

This narrow view of corporate purpose is as outmoded as the horse drawn buggies that were the primary means of wheeled transportation when corporations first came to be considered to not have a defined public purpose. Until the mid-1880s, corporate charters were obliged to serve pubic purposes, regardless of the hopes of shareholders’ hopes for returns on their investments.

For reasons we detail in Firms of Endearment, capitalism is undergoing the biggest ideological change in its history. The idea that corporations should serve society as well as shareholders is being restored. Whole Foods is one of the 30 companies we put forward as exemplars in the social transformation of capitalism that is underway.

The sweet irony of the FoE business model is that it appears to generally be a more dependable approach to produce and sustain profitability than the traditional business model defended by T.J. Rodgers. His acidic attack on Mackey is all the more curious because investors have generally not fared well from their Cypress Semiconductor investment. Its balance sheet shows negative retained earnings of $408 million. “This means that in its entire 23 years of history, Cypress has lost far more money for its investors than it has made,” wrote Mackey in his decidedly more temperate rebuttal.

How is it that T.J. Rodgers can shamelessly attack John Mackey for wooly-headed thinking when Rodgers’ company has performed so poorly for its investors? Attacking a person’s fundamental beliefs, whether those beliefs are in the religious, political, economic or other domains usually raises the hackles on the neck and triggers irrational responses. Certainly that’s the case with Rodgers being told that his traditional business model is flawed.

In any event, the accompanying chart tells the dramatic story of how FoE stock investments typically perform.

Next: The signature characteristics of FoE companies.

Comments

[Manny]

This could be the next Good-to-Great... do you know when the bool will be published and who will be the publisher?

[David]

The book is scheduled to come out in April under the Wharton Business School imprint.

[Manny]

Wharton is impressive! I’ll make sure to pre-order Firms of Endearment from Amazon.

[David Wolfe]

Firms of Endearment will come out in April under the Wharton Business School Press imprint.