Wall Street Security Analysts Miss the Boat on Bad Guys, Hammer on the Good Guys(A)
It’s clear by now that the books were cooked at three sizeable corporations: Enron, Tyco International and WorldCom. So, did any Wall Street security analyst spot these shenanigans as they pored over the financial statements issued by these companies? Not one, as far as I have heard.
On the other hand, there are some financial figures that security analysts fixate on. They recently shot down the stock of Costco Wholesale, complaining that this operator of more than 400 warehouse club stores was paying its workers too much. Checkout people at Costco start at $10 an hour, considerably more than the $7.65 an hour that many Wal-Mart cashiers get when they hire on. Costco also pays 92% of the health insurance premium for employees while Wal-Mart covers only 66%.
Horrors! Now that’s something to worry about. Never mind about fraudulent reporting. Costco needs to be more hard-nosed to improve its profit margins. “From the perspective of investors, Costco’s benefits are overly generous,” said Bill Dreher, retail analyst at Deutsche Bank Securities. “Public companies need to care for shareholders first.”
Emme Kozloff, a retail analyst at Sanford C. Bernstein, agreed, saying: “Their benefits are amazing but shareholders get frustrated from a stock perspective.”
These well-fed, well-paid analysts sitting in their New York offices ignore that employee turnover at Costco is one-half of what it is at Wal-Mart, resulting in considerable savings. Business Week looked at Costco in April and pointed out that it generates profits of $13,647 per employee compared to the $11,039 racked up by Wal-Mart’s Sam’s Club. The magazine concluded: “We found that by compensating employees generously to motivate and retain good workers, one-fifth of whom are unionized, Costco gets lower turnover and higher productivity.”
I also did not notice Wall Street analysts picking up last month on the very first social responsibility report issued by the Gap. This is not part of their regular reading. However, the report deserves their attention. Sourcing production overseas in low-wage countries is central to the operation of U.S. garment companies – and how they manage it has a great deal to do with their bottom line. Gap’s report contains the most comprehensive and candid description I have seen of how one company monitors this activity around the world. It represents a strong response to the charges of sweatshop labor.
The Gap has more than 90 fulltime employees who make on-site inspections of factories. All new factories must undergo a multi-step qualification process beginning with a written agreement to abide by the Gap’s Code of Vendor Conduct. About 90% of factories fail the initial inspection but then make improvements that result in an approval rate of 84%. Last year the Gap revoked the approval of 136 factories. The report has charts showing region-by-region violations of code violations.
Impressive also is the Gap’s willingness to work with outside groups including NGOs and labor unions. Signing off on this report is a Public Reporting Working Group whose members are: Domini Social Investments, the Calvert Group, the As You Sow Foundation, the Center for Reflection, Education and Action (CREA) and the Interfaith Center for Corporate Responsibility (ICCR). They commend the company for “recognizing that its code of conduct sits within the broader context of international human rights norms. It is an important recognition of public accountability.”
Transparency is the name of the game – and the amount of detailed information provided in this report is staggering. For example, here is a rundown of the number of factories producing clothes for Gap stores (these include Banana Republic and Old Navy):
Greater China: 464; North Asia: 200; Southeast Asia: 671; Indian Sub-Continent: 592; Persian Gulf: 42; North Africa & Middle East: 91; Sub-Saharan Africa: 118; Europe: 277; USA & Canada: 188; Mexico, Central America & the Caribbean: 298; South America: 68.
Amazing list – and never before disclosed. If social responsibility activists want evidence that their efforts are paying off, it’s here in this Gap report. And it’s high time for Wall Street security analysts to learn what to measure.