Why Costco Can. Why Mylan and Wells Fargo Can’t!

Commenting on the performance of Mylan CEO Heather Bresch and Wells Fargo CEO John Stumpf before Congress, Jeff Sonnenfeld, senior associate Dean for Leadership studies at the Yale School of Management said they both, “were unprepared and did not show genuine contrition.” He went on to add, “It’s pretty upsetting. In both cases there’s a huge loss of trust, public health trust and financial trust.”

I’ll say! At salaries of $18 and $19 million a year respectively you’d think you would get better than this! Having testified before Congress I can tell you that unless you and your staff are living in another universe you are prepared. Your remarks are prepared ahead of time and you’ve practiced the questions you know you will be asked.

Thus we have to ask what’s going on? To do that, I want to compare these firms with a company that excels and that millions of Americans swear by. Eighty five million people! That’s Costco, a firm that charges a minimum of $40 a year just to belong and people happily pay it to enjoy lower gasoline and pharmacy prices and an average markup of only 12% on most other products.

They don’t accomplish this as a not for profit. Indeed, they are a public company listed on the New York Stock exchange. With a market cap of $68 billion and 200,000 employees this is a big company. Their CEO earned $6 million in 2015, a modest amount in comparison to the other two CEOs we are going to talk about.

Mylan is roughly one third their size. Their market cap is $22 billion and they have 35,000 employees. Impressively, Costco generates a return on equity of 21 times while Mylan is at 8. So, Mylan is much smaller and their financial performance is not nearly as good. But, their CEO is paid three times that of the Costco CEO. Oh yeah, she lied about her educational background too. Little wonder then, that she doesn’t have a good story before Congress. Media reports cite the cost of epinephrine and the injector at about $11, If, as she alleges, their ‘real’ price is $150 per pen then the mark up is 13 times her true cost! That is a far different model than at Costco.

Indeed, she’s lucky her father is a Congressman or her questions might have been even tougher than they were. For at the end of Mylan’s annual report, around page 40, they write, “We put people first, trusting that profits will follow. This philosophy, which we call Doing Good and Doing Well, reflects our belief that Mylan is not just a company, we’re a cause.” BALONEY!

Indeed they may be a cause, just not the cause they want you to believe they are seeking. Their annual report conforms to Dutch law because Mylan is one of those firms that completed an inversion to avoid U.S. taxes! So, they charge Americans an outrageous price for the EpiPen while they legally cheat the country out of its taxes! Their real mission has nothing to do with taking good care of Americans. It’s found on page 8 of their annual report where they write, “we believe that we can maximize the profitability of our generic product opportunities….”

In other words, Doing Good and Doing Well are just words; marketing hype as it were. Their real actions tell a far different story.

So too at Wells Fargo. They are big with a $225 billion market cap and 265,000 employees. In a very difficult earnings environment Wells Fargo is generating 13 times equity, which makes it easy to understand why Warren Buffett owns so much of their stock. Without question, Mr. Stumpf has delivered in terms of financial performance.

Oh and they have nice words in their annual report as well. “We never take for granted the trust our customers have placed in us….” BALONEY!

Mr. Stumpf incredibly said in the Congressional hearing, “I disagree with the fact that this is a massive fraud.” Senator Warren was right when she said, “You squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it went all blew up … you went on television to blame thousands of $12 an hour employees.”

Once again their actions speak far louder than their words! That is why both firms have failed and why Costco and other firms like them succeed. At poor performing companies senior management is unable to bring strategy, focus and execution into alignment. In short, they aren’t leaders. But at Costco there is harmony in their words and in their deeds.

They write in their annual report, “Preserving and enhancing our Company culture, developed over more than three decades, remains an ‘imperative’.” They go on to say they are “focused on exceeding the expectations of our stakeholders – our members, our employees, our suppliers and our shareholders – each and every day,” and in their case they really mean it.

Their margins are low with respect to their customers, their average pay in 2013 was $21 an hour, their suppliers are happy and their stock has performed. In other words, the ‘words’ in their annual report are not just marketing. They reflect a strategy that the corporate team is focused on executing.

If we are to succeed as a Nation we need a lot more Costco’s and a whole let less of Mylans and Wells Fargos.

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