Firms of Endearment: How World-Class Companies Profit from Passion and Purpose
Authors: Jagdish Sheth, David B. Wolfe, Rajendra Sisodia
Book Review by: Javier Ortega-Araiza
What makes a company successful? Many of the answers that would be given to this long-standing question would go along the lines of the traditional financial metrics: Return on Equity, Return on Investment, or Free Cashflow to Firm. However, the truth is that the goal of the corporation goes way beyond being solely the generation of profits. A corporation is a vehicle that should be used to provide value to society. John Mackey, author of Conscious Capitalism, comments on this: “For some people the purpose of business is to make money. And it’s just not the right answer. Every business has the potential for some other higher purpose besides just making money. Of course, it has to make money just like my body has to make red blood cells if I’m going to live. But the purpose of my life is not to produce red blood cells. My purpose is more transcendent than that”.
Mackey’s analogy has been further expanded in the book Firms of Endearment: How World-Class Companies Profit from Passion and Purpose, with its authors stating: “Today’s greatest companies are fueled by passion and purpose, not cash. They earn large profits by helping all their stakeholders thrive. These rare, authentic firms of endearment act in powerfully positive ways that stakeholders recognize, value, admire, and even love. They make the world better by the way they do business-and the world responds”. Authors Sheth, Wolfe, and Sisodia, have identified these firms of endearment and analyzed their performance as well as their impact both to the inside of the organisation and to the outside to the community.
The results have been clear. A company categorised as a Firm of Endearment has significantly outpaced its competitors as well as the general market, represented in these numbers by the S&P 500 index. So what classifies a company as a firm of endearment? There is a set of core values and beliefs by which companies classified as Firms of Endearment operate. One of them is that they respect and value the ideas of every member of the organisation, allowing communication to flow freely through an open-door policy. Google, Bloomberg, and Facebook are great examples of this. I’ve been through their headquarters personally, and the CEOs and members of senior management are completely approachable and open to discussion with any member of the organisation. This structure has allowed firms of endearment to thrive, as communication channels are open allowing ideas to pass on rather than being stopped by a strict line of hierarchy. Besides, it is common to see CEOs or other members of senior management of Firms of Endearment involved in every task of the organisation and interacting actively with every level of employees, as well as with customers. Former Air New Zealand CEO Rob Fyfe used to help employees on-field load bags onto the planes, while JetBlue Founder and CEO David Neeleman is known to fly the airline frequently to get feedback from passengers about how to improve the customer’s experience.
Companies categorised as firms of endearment also have a strong corporate culture and a specific recruiting process that guarantees that only people that are fully identified with the values and ideals of the organisation will end up working there. For example, Zappos.com operates a recruitment process where several employees interview potential hires and target the questions specifically to see whether the individual fits with the culture or not. They also make sure that new hires are passionate about the company’s services or products, which in turn strengthens the culture of the organisation. For example, Whole Foods hires people who are passionate about organic food and healthy eating, while Patagonia often does the same with people who are into mountain climbing. By hiring people who share interest with the company’s main offerings, they also reinforce their capacity to innovate and generate new ideas.
Compensation is another of the aspects in which firms of endearment are differentiated from their peers. Firms of Endearment compensate all of their employees properly, above the industry average, and their executives, while well compensated, do not receive disproportionate salaries compared to the majority of their employees. For example, Costco CEO Jim Sinegal draws home a $350,000 salary, compared to a salary of $4.4 million given to Mike Duke, former CEO of Wal-Mart, in a period of one year. Besides, employees are constantly trained and encouraged to develop new abilities, as well as given the opportunity to work in their personal projects. (Think of Google and the now defunct 20% policy, which allowed employees to focus 20% of their time into their personal projects).
Because of the above, firms of endearment rarely need to engage in expensive and brainwashing marketing or advertising campaigns, as the excellence of their service and products, as well as their corporate responsibility and well-standing on the community often speaks by itself. When has a company like TOMS ran an expensive advertising campaign? Or Google? Most of these companies, like Whole Foods, Patagonia, or Starbucks, have raised brand-awareness by actively engaging with the community and providing active value, which indeed has also boosted their bottom line and provided them more profits than their more hard-nosed, greedy competitors.
To wrap up, we can conclude that a firm of endearment is classified as such because it includes all of their stakeholders, represented by society, partners, investors, customers, and employees, aligns their interests, and is able to provide something of value to all of them. A firm of endearment is in business to contribute to change the world, because all of its stakeholders share an interest that is larger than themselves and their wallets, and ironically, by pursuing this interest, most of them were able to get richer than they ever thought.