What Is a Firm of Endearment?
Consider the words affection, love, joy, authenticity, empathy, compassion, soulfulness, and other terms of endearment. Until recently, such words had no place in business. That is changing. Today, a growing number of companies comfortably embrace such terms. That is why we coined the phrase “firms of endearment,” or FoE. Quite simply, an FoE is a company that endears itself to stakeholders by bringing the interests of all stakeholder groups into strategic alignment. No stakeholder group benefits at the expense of any other stakeholder group, and each prospers as the others do. These companies meet the functional and psychological needs of their stakeholders in ways that delight them and engender affection for and loyalty to the company.
During the 1990s, the phrase “share of wallet” became popular among marketers. It became the primary focus of the marketing approach called customer relationship management (CRM). However, the term signified an emotionally barren, largely impersonal and quantitative view of customers. For the vast majority of companies, CRM was more about better targeting and deeper exploitation of customers through data management than about empathetically attending to their needs. Instead of customer relationship management, it would have been more accurate to call it customer data management.
FoEs have bought into a different idea; they strive for share of heart. Earn a place in the customer’s heart and she will gladly offer you a bigger share of her wallet. Do the same for an employee and the employee will give back with a quantum leap in productivity and work quality. Emotionally bond with your suppliers and reap the benefits of superior offerings and responsiveness. Give communities in which you operate reasons to feel pride in your presence, and enjoy a fertile source of customers and employees. (Of course, the phrase “share of heart” suggests that there is a fixed amount of love and care to be divided among claimants. In reality, there is no such limit, as the expression “Love is not a pie” suggests.)
And what about shareholders? Except perhaps among day traders and other short-term speculators, most shareholders probably enjoy feeling good about the companies in which they invest. They want good returns, but they also take delight in investing in companies they truly admire. Most do not want support companies that are morally deficient. Of no little importance, institutional investors such as university endowment funds and pension funds have grown increasingly conscious of the moral character of companies they invest in; witness the rapidly growing trend toward sustainable, responsible, and impact investing.
Unfortunately, the vast majority of companies today cannot be described as firms of endearment. Many have enjoyed success in the past, but find themselves increasingly vulnerable and criticized from all sides. Such companies are under growing pressure today, while their FoE competitors stand tall with all their stakeholder groups while acquitting themselves with distinction in investment markets. The message of this book is clear and simple: Provided that sound management is in place (no amount of moral correctness can save a badly managed company), endearing companies tend to be enduring companies.
FoEs share a distinctive set of core values, policies, and operating attributes. Here is a sampling:
- They subscribe to a purpose for being that is different from and goes beyond making money.
- They actively align the interests of all stakeholder groups, not just balance them. Instead of trading off the interests of one group versus those of another (for example, higher wages for employees versus higher profits for investors or lower prices for customers), they craft business models in which the objectives of each stakeholder can be met simultaneously and are in fact strengthened by other stakeholders. The key to this “concinnity” is that the activities of FoEs are executed within a system that allows for the active alignment of stakeholder interests. For example Whole Foods Market captures this idea in its formal “Declaration of Interdependence,” which acknowledges the idea that stakeholder groups constitute a family whose members depend on one another.
- Their executive salaries are relatively modest. In a typical year, Costco co-founder and former CEO Jim Senegal’s salary was $350,000, accompanied by a bonus of $200,000. By contrast, the average CEO of a comparable public company received $14.2 million in total compensation in 2012.
- They operate at the executive level with an open door policy. For example, when Honda has a big problem, it implements waigaya—temporary suspension of social protocols based on rank, thus making it possible for workers on the lowest rungs to personally present a proposed solution to the highest executives involved. Harley-Davidson has a similar policy, except less ceremonial: Any employee on any day has access to the highest offices in the company.
- Their employee compensation and benefits are significantly greater than the standard for the company’s category. For example, Trader Joe’s pay and benefits in the first year for full-time employees are double the U.S. average for retail employees.
- They devote considerably more time than their competitors to employee training. For example, The Container Store’s first-year employees get an average of 263 hours of training versus the retail industry’s average of eight hours.
- Their employee turnover is far lower than the industry average. For example, Southwest Airlines’ employee turnover is half that of other major airlines.
- They empower employees to make sure customers leave every transaction experience fully satisfied. For example, a Wegmans Food Markets employee once sent a chef to a customer’s home to overcome a customer’s mistake and cook the Thanksgiving meal. (Yes, Wegmans employs chefs, some from five-star restaurants.)
- They make a conscious effort to hire people who are passionate about the company and its products. For example, Patagonia tries to only hire people who are passionate about nature. Whole Foods Market tries to draw as many employees as possible from the ranks of “foodies.”
- They consciously humanize the company experience for customers and employees, as well as creating a nurturing work environment. For example, Google provides free gourmet meals around the clock for all employees.
- They project a genuine passion for customers, and emotionally connect with them at a deep level. By earning a larger share of customers’ hearts, they earn a larger share of customers’ wallets. Nordstrom, for example, is legendary for its commitment to outstanding customer service.
- Their marketing costs are far lower than those of their industry peers, while customer satisfaction and retention are far higher. For example, Jordan’s Furniture spends less than one-third the industry norm on marketing and advertising, while generating industry-leading sales per square foot that are more than five times the industry norm. Google has built one of the world’s most valuable brands without any advertising.
- They view their suppliers as true partners and collaborate with them to move both their companies forward. They help suppliers reach higher levels of productivity, quality, and profitability. Suppliers, in turn, function as true partners, not as beleaguered indentured servants. For example, Honda is said to “marry suppliers for life.” Once a supplier has gained admittance to the Honda family of suppliers, the company does everything it can to help the supplier improve quality and become more profitable.
- They honor the spirit of laws rather than merely following the letter of the law. They apply uniformly high operating standards across the world, regardless of local requirements that may be considerably less stringent. For example, IKEA’s policy is that if strict laws concerning chemicals and other substances are imposed in a country where it does business, all suppliers in all countries must conform to such laws.
- They consider their corporate culture to be their greatest asset and primary source of competitive advantage. For example, Southwest Airlines has an elected “Culture Committee” charged with sustaining and strengthening the company’s unique culture.
- Their cultures are resistant to short-term, incidental pressures, but also prove able to quickly adapt when needed. As a result, they are typically the innovators and breakers of conventional rules within their industries. Stonyfield Yogurt shuns traditional advertising, for example, relying instead on creative social media campaigns.
While financial data surely is important in analyzing a company’s strength and past performance, qualitative indicators are even more important in assessing a company’s future prospects. In fact, we would go so far as to say that in many instances, qualitative factors may be more revealing in drawing the picture of a company’s future performance than quantitative factors.