Doing Good While Doing Well Sorenson

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Conscious Capitalism

Doing Good While Doing Well

Asian Institute of Management

February 23, 2011

Dr. Ralph Z. Sorenson


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In the U.S. We Live In In Era of Public Distrust

Of Capitalism & CorporationsDaily headlines citing tales of greedy, corrupt CEOs

& senior executives of major public companies


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The American Rogues Gallery Of

Corruption

Bernie Ebbers of WorldCom

John Rigas & Son of Adelphi Dennis Kozlowski of Tyco Martha Stewart of Martha Stewart, Inc.

Richard Scrushy of Health South Michael Milken of Drexel Burnham Ken Lay, Jeff Skilling & Andrew Fastow of Enron Bernie Madoff Raj Rajaratnam, Galleon Group

Alllen Stanfordand others


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Gordon Gecko: Greed is Good!


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You cant take it with youbut perhaps you can eat it !!


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Governance Also Being Criticized:Some boards of directors are accused of:

Incompetence Being rubber stamp cronies

Illegal trading in companys stock

Back-dating of stock options Being over-compensated for board service

Providing inadequate oversight over financialreporting, corporate controls, risk taking, andexecutive compensation

Having unhealthy interlocking directorships


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Interlocking Directorships


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The Media Are Having a Field Day Targeting

The Corrupt Capitalist System UN Attacks Capitalism (UNCTAD Study)

6 Charged in Vast Insider-Trading Ring (WSJ)

Outrageous CEO Salaries Are Nationwide ScandalWhere Are The Politicians?

Obscene & Excessive Lou Dobbs on CE0

Compensation vs. Minimum Wage; CNN News

Gallup Poll: Widespread Dissatisfaction With Free Market


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In short,Main Street is at war with Wall Street

andmuch of the corporate community !


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Sadly,

much of the criticism is

justified !


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Result:

Growing efforts on the part of

U.S. government to try to legislatehonesty, integrity, and morality

Many new laws, regulations, and

interventions into the private sector


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Examples

Foreign Corrupt Practices Act

Sarbanes-Oxley legislation

Banking and financial services interventions

Strings attached to TARP and bailout

programs Compensation controls

Government takeover of General Motors

Health care reform legislation

Financial reform legislation

.and many others


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The Big Question in the U.S.:(and the rest of the world)

Is it possible to retain free-market capitalism as a

powerful positive force for creating jobs, innovation,and economic well-being while making it more

responsive to the interests of all stakeholders, not

just shareholders ??OR

Are we destined to see ever-increasing government

involvement & intervention in the workings of theprivate sector ??


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Some Examples of Companies That Appear to be

Doing Good While Doing Well*

Amazon Honda Southwest

CarMax IKEA Starbucks

Caterpillar JetBlue Timberland

Commerce Bank Johnson & Johnson Toyota

Container Store Jordans Furniture Trader Joes

Costco L.L.Bean UPSeBay New Balance Wegmans

Google Patagonia Whole Foods

Harley-Davidson REI

* Courtesy of Firms of Endearment; Sisodia, Sheth, & Wolfe;

Wharton School Publishing; 2007; page 16


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LETS TAKE A CLOSER LOOK AT THE

LAST OF THESE COMPANIES:WHOLE FOODS MARKET

Why do I single out Whole Foods Market?

Simply because, being a director of the company, I

know it well and because I believe it represents aunique approach to management and governance

that is well worth emulating and that could represent

the wave of the future for corporations and otherentrepreneurial enterprises

in the U.S. and around the world


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Whole Foods Market: Whole Foods has been the fastest growing & most profitable

publicly owned food retailer in the U.S. in the last 10 years

It focuses on selling high quality natural & organic food

Current annual sales are in the $9 - $10 billion range

305 stores in U.S., Canada, & England

~ 57,000 team membersall non-union

13 years on Fortune list of 100 best places to work!


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WHOLE FOODS MARKET (CONTINUED)

Same store sales growth has averaged 9% over last 15years

EBITDA CAGR of 30% since IPO in 1992

WFM ranks 284 on the current Fortune 500 list

Market capitalization is in $10 billion range

Stock price is in the $60 range; PE Multiple: 35 - 40 !

$100k invested in 1992 IPO now worth ~$1.5 M; 1500%gain !


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In short, Whole Foods has been anextraordinary success story by

almost any standard ofmeasurement


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What lies behind this success?


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Whole Foods calls its

management approach:

CONSCIOUSCAPITALISIM

A New Business Paradigm?


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Lets start with the tone at the top, beginning

with executive compensation in America


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Executive Compensation

Average large public company CEO is paid 300-400

times as much as the average company employee !!!

At Whole Foods total cash compensation is capped at 19

times that of the average team member.

In 2010 the salary and cash bonus cap was $652,400far less cash compensation than senior executives earnin comparable public companies.


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But what about equity compensation?


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Stock Options

Whole Foods does make use of stock option grants.

But 93% of grants go to non-executive teammembers, the vast majority of whom work in thegrocery stores.

Meanwhile the top 5 executives in the company, includingthe CEO receive identical stock option grants.

In 2008, these grants were each valued in the proxystatement at roughly $150,000extremely modest byFortune 500 standards.

Just in case you were wondering, John Mackey, founder ofthe company, owns less than 1% of company stock.


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The Distribution of OptionsThe Distribution of OptionsThe Distribution of OptionsThe Distribution of Options

Estimated distribution ofoptions at Fortune 500 firms

as of 2005

Top 5Execs75%

All Others

25%

Distribution of WFM optionsgranted as of 2005

All Others93%

Top 16

Execs7%

Data Source: Profits with Principles


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And , by the way, in 2006 John Mackey

decided he no longer wanted to work for

money and he nowworks for a salary of $1.00 a year

and donates all of the

stock option grants for which he is eligible tothe

Whole Planet Foundation!


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Senior executives have no other perks


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All team leaders receive same discounts andhealth benefits as all other team members

All fly economy class & stay in modest hotels

No company cars or drivers

No club memberships

Per capita dollar cap on what can be spent onbusiness meals, with any excess coming out ofthe individuals pockets


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Other Examples ofTone at the Top


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1. CEO-inspired culture of shared fate

2. We dont cut corners: commitment to honesty and integritystarting at the top

3. Deep & fundamental respect for all team members

4. Belief in giving all team members considerable responsibilityand authority

5. Total internal transparency re: company-wide compensation,store and department performance, operational policies


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Tone at the Top Examples (Continued):

6. New team members are approved by theirpeers, not their team leaders

7. Company-wide practice of promotion fromwithin

8. All team members vote on their benefits

9. Non-union shared fate philosophy

makes unions unnecessary

10. INNERVIEWS team member written magazine


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LESSON TO BE LEARNED:

Tone at the top really matters!

Whole Foods compensation policies andegalitarian management practices engender a

tremendous sense of trust in managementamong team members

throughout the company!!!

WE ARE ALL TRULY ON THE SAME TEAM

Th 3 Pill f


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The 3 Pillars of

Conscious Capitalism1) Enterprises that are primarily driven by their

mission and their sense of purpose

2) Committed not solely to maximizing profits toshareholders, but rather to optimizingreturnsto allstakeholders:

- customers - employees

- partners - investors

- communities - environment

3) Led by purpose and mission driven servantleaders & entrepreneurs..(often founders ofthe company)

Th Wh l F d M k t B i M d l


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The Whole Foods Market Business Model:Holistic Interdependence


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Whole Foods Core Values:

Core Value #1: Mission

To sell the

highest quality, delicious

natural and organic foodspossible and, in the process, help change

for the better the way people eat

and the way agriculture is practiced


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The Culture Captured in a Sign:

Team Members

Did you know that you are

Empowered to WOW CustomersAt any & every opportunity?

What does this mean? Whenever you are not sure how to handle theneeds of a customer, you have the authority as a team member to makea decision and exceed that customers expectations. You can discuss

the situation afterwards with leadership and maybe come up with a bettersolution, but there is no wrong decision when the customer leaves

HAPPY AND WOWED! Customer service is where westand head & shoulders above the competition and it is because ofyou!

#3: Team Member Happiness &


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#3: Team Member Happiness &

Excellence Team Members are the next mostimportant stakeholders

Relationship among team membersis based on trust engendered bytone at the top, transparency,genuine caring

Importance of shared purpose +empowerment + a consciousrejection of command & controlmanagement

Fair pay and attractive benefits

Great place to work (13 years onFortune 100 List)

#4: Win Win Partnerships with Suppliers


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#4: Win-Win Partnerships with Suppliers

The leading retail outlet for theenormous growth of natural &organic food in the last 30 years

Success not possible withoutdedicated supplier-partners

WFMs success has helped thesesupplier-partners to grow andflourish and they, in turn, havehelped WFM flourisha win-win for

all

Strong competitors have alsohelped!!


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Core Value # 5: To provide attractive returns to investors

through profits and growth .

The reasoning: If the company has happy team members who,with the support of its suppliers, delight customers by offeringthem delicious natural and organic food along with world-classservice, it follows as night the day, that shareholders, in the long

run, will also be delighted and well rewarded.

Only after talking about the above top four core values does JohnMackey (CEO & founder) go on to talk about shareholder value.


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And, for the most part, they

have been !

# 5 P idi I t ith tt ti t


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# 5: Providing Investors with attractive returns

through profits and growth Shareholder are the owners of

the company

Their role is to provide capitalfor innovation and growth

Managers and employeesare stewards of that capital

Profit: the end resultof optimizing

gains for other stakeholders,not a goal in & of itself

Profits, in turn, create wealth

& prosperity for shareholders


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Whole Foods has two additionalCore Values

#6 To care about communities, the environment, andthe humane treatment of animals.

#7 To promote the health of all stakeholders throughhealthy eating education.

Commitment to Communities:


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Commitment to Communities:

Philosophy: Corporate philanthropy because it is goodbusiness and because it is the right thing to do!

Overall Policy: 5% of net profits are donated to charities

Policy in place for 20 years, since first mission statement was drafted

Local store level 5% days (5% of sales contributed to local non-profits)

Donation of day-end perishable food to community food-shareorganizations

Contributions in natural disasters: e.g. Katrina

Whole Planet Foundation: Partnership with Grameen Bank& Muhammed Yunis Micro Loans in developing countries

WhereWh l Pl


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Agriculture &livestock

Indigenous

handicraftsCorner Stores

Prepared Foods

Loans used for:

Whole Planet

FoundationCurrently Works

Costa Rica Guatemala,

Nicaragua Honduras,

Mexico Columbia,Peru

Queens--NY

Nepal India

East Timor Indonesia

Kenya Ethiopia

98% women

55,000+ Members

$10+M loaned out

98% Repayment

Leader In Environmental Stewardship


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Leader In Environmental Stewardship

TheonlyFortune500company

topurchaseenoughwindenergy

creditstooffset100%ofitselectricity

use:750megawatts/yr

Two-timewinneroftheEPAsGreen

PowerPartneroftheYearaward.

Solarpowerin20stores&growing

3storespoweredbyhydrogenfuel

cellswithmoretocome

Commitment to the Environment:


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Commitment to the Environment:

Extensive re-cycling program; no plastic shopping bags

Extensive use of re-cycled and re-usable materials

Attempting to minimize packaging materials, green itstrucking fleet & warehouse operations

Extensive program of working with organic farmers andvendorsboth in U.S. and in developing countries

$10 million loan fund to support organic farming

Leader in promulgating FDA standards for organic andnatural food & for truth in labeling

Active program to oppose use of GMOs

Core Value # 7:


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Promoting the Health of Stakeholders Through

Healthy Eating Education


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Unhealty Eating and Health Care

Promoting the Health of Stakeholders Through


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Healthy Eating Education

GOAL: Combat obesity & promote better health for everyonethrough healthier nutrition.

Recently formed partnership with Chef Ann Cooper to createthelunchbox.org, a Web site that features practical tips on how toimprove the state of school lunches.

Launching Customer Wellness Clubs where customers canlearn more about developing healthier, more nutritious eatinghabitsthe ANDI INDEX.

Adding in-store nutritionists

New internal programs to incent team members to improve theirhealth. (The healthier you are, the greater your in-store discount!)

Summary


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Summary

Shareholders are served best when returns areoptimized for all stakeholders:

customers partners communitiesemployees investors environment

government

In the long run, it is better to be mission driven,thanprofit driven

Profits = an endresult, not a goal in and ofthemselves

Summary (Continued)


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Summary (Continued)

Believing in the mission of the company counts !

The tone at the top counts !

Leadership counts ! (servant leaders moresuccessful in the long run than command &control leaders)

Culture counts !

Companies can do good while doing well !


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Conscious Capitalism:

Putting the enlightened

back into the concept ofenlightened self-interest


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At Whole Foodsand the foregoing companies

Conscious Capitalismappears to be working

QUERY:

Can it work in other

Companies & Organizations?

Documents

Doing Good While Doing Well Sorenson