Customers look first
and foremost to corporations for quality goods at a fair price. They can most
easily reward or punish companies by remaining loyal customers or taking their
business elsewhere. However, customers also have more at risk than the simple price
of their purchase when they patronize a corporation. They risk their physical
well-being when it comes to product safety and health, their financial
well-being when it comes to financial services, and their peace of mind more
generally when it comes to appropriate levels of customer service and
satisfaction. Corporations that invest in long-term relations with customers
through exceptional attention to innovation, product quality, and customer
service can expect to be rewarded by increased market share and longer-lasting
customer loyalty.
Themes
The following are the
five major themes by which we assess the strength of corporations’
relationships with their customer and client partners:
While
other issues are also important in this regard, these five are those which we
believe we can most meaningfully and consistently assess.
Harmful and Addictive Products: Tobacco,
Gambling, Alcohol
Certain
products — such as tobacco, gambling, and alcohol — are both harmful and
addictive. Tobacco is highly addictive, causes more than 400,000 deaths
annually in the United States alone, and can cause health problems for those in
the vicinity of its users. Alcohol abuse was estimated to have been responsible
for some 85,000 deaths in the United States in 2000 and cost the economy an
estimated $185 billion in 1998. Approximately 16,000 of the 40,000 automobile
fatalities each year in the U.S. are caused by drunk drivers. Pathological
gamblers make up an estimated 1% to 2% of the U.S. population, and problem
gamblers make up an additional 3%.
These
products can play a useful role in society, providing individual pleasure, and
in the case of alcohol even health benefits, if appropriately used. However, we
believe that putting these products in the hands of large publicly traded
corporations dramatically increases the potential for their abuse and their
costs to society. Large public corporations are relentlessly driven to innovate
and expand their reach, marketing their products as aggressively as possible to
as many customers as possible. For these companies, effective marketing often
means exploiting customers’ addictions to these products or ignorance of their
risks. For these reasons, we do not invest in companies that are significant
manufacturers of alcoholic beverages or tobacco products, or significant
providers of gambling goods and services.
Commitment to Safety, Quality, and Customer
Service
The
benefits to companies from providing their customers with quality goods and
services are substantial and the costs from product safety lapses are high.
Companies that are willing to invest in improvements in their manufacturing
processes, and in the customer-service training of their employees, can look
forward to long-term rewards in the marketplace. High-profile scandals from
product safety issues can cost companies not only in short-term legal bills and
loss of customer confidence, but in long-term damage to their public reputation
that is particularly hard to undo. A drug company that handles a highly
publicized safety problem well can enjoy decades of high esteem. One that
handles such a problem poorly can be embroiled in equally long controversy. We
consequently look for companies that understand the long-term benefit of
investing in product safety, quality manufacturing processes and training, and
company-wide commitments to customer service.
Bridging the Divide in Access to Products
All
too often, companies neglect markets in the mistaken belief that customers
cannot afford their products. Whether it is the poorer neighborhoods of urban
centers or the rural regions of the developing world, potential markets are often
neglected through ignorance, prejudice, or simple laziness. Yet investing in
creative ways to serve these markets not only provides companies with an
expanding customer base, but speeds economic development and poverty
alleviation around the world.
We
therefore value highly companies that have, among other things, found ways to
bridge the digital divide by making computing technology available around the
globe, to site retail outlets in depressed inner cities of the United States,
to provide drugs at affordable prices in poverty-stricken regions, or to bring
personal care products to the rural poor in the developing world.
Innovation and Creativity
One
of the great benefits of capitalism is its ability to drive companies to
innovate. Such innovation, often with the support of government, leads to
improvements in existing products or development of new products, the discovery
of new technologies, or the application of old technologies to new purposes.
True innovation and creativity can bring about transformative advances such as
personal computers and the Internet, or cell phones and mobile communication.
However,
innovation can be a two-edged sword. Failure is, almost by definition, a part
of the process of innovation. Investments in research and development can be
wasted by management that lacks the ability to bring products to market. More
seriously, new products or technologies can cause more harm than good. Lead
additives to boost the octane of gasoline, chlorofluorocarbons to manufacture
packing materials, asbestos as a fire-retardant insulator, and persistent
organic pesticides for use in agriculture are examples of products that in
retrospect it is safe to say should never have come to market. However,
hindsight is not always possible and it is often difficult to evaluate new
products that depart radically from today’s norm, such as genetically modified
foods or chemical compounds created with new nanotechnologies.
Moreover,
lack of proper attention to product testing and evaluation procedures can lead
to controversy. Two areas of particular concern to us are proper procedures in
the clinical trials for drugs and efforts to reduce the use of animals in
product safety testing. Elaborate trials for approval of new drugs are a
necessary part of our pharmaceutical industry. However, their very complexity
opens them up to the possibility of abuse. Among other things, data can be
faked, trials can be used as a covert form of marketing, and inappropriate
procedures can be used to solicit human participants in these trials. We expect
drug companies to minimize the risk of such abuses.
In
addition, for these and other products, the use of animals may also be
required. We look for companies that are not only minimizing their use of
animals in all required safety tests, but also investing in, and advocating the
use of, new testing technologies, so that adequate substitutes for animals can
be found.
Companies’
investments in innovation and testing must be judicious and effective, and
management needs to take appropriate actions when evidence of harm or failure
is at hand. Firms that strike this difficult balance successfully have every
reason to expect to be market leaders. We therefore look for companies that are
committed to research and development, are effective in bringing innovative
products to market, take due considerations in the management of their product
safety testing, and appropriately recognize and manage the potential for
failure or for harm of new products and technologies.
Marketing and Pricing Practices
Appropriate
decisions about marketing and pricing are the daily bread and butter of
well-run firms. These are the fundamental market mechanisms through which
managers can learn what customers want and need, how their firms can best
operate efficiently, and how best to allocate their capital. However, the
pressures of the marketplace all too often lead weak management to abuse and
distort these market mechanisms through such short-sighted practices as colluding to fix prices, offering doctors rewards
for prescribing medicines, aggressively marketing to children who can’t
exercise independent judgment, and other steps that often tread on the edge of
legality. These practices not only harm customers, but weaken the very markets
they were meant to enhance.
Price-fixing
controversies are a frequent occurrence and we evaluate them on a case-by-case
basis. In doing so we take into account the often effective role governmental
regulators already play, the extent of the harm done to customers and other stakeholders,
and the type of customer harmed. We usually do not take into consideration
patent disputes and charges of unfair marketing practices so often made between
business competitors. We view with concern, however, such disputes when they
occur between corporations and communities or governments, such as those
concerning the rights to indigenous knowledge, or other intellectual property
disputes.
