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Archive for August, 2004

Costco: Paragon of Corporate Virtue, or a Company that Discriminates Against Women?

Thursday, August 19th, 2004

Until Tuesday of this week, if you’ve heard much about Costco Wholesale at all, especially in the context of how the company treats its workers, it was probably positive news. Costco, the big box wholesale warehouse retailer, was getting plenty of good press in the past few years as the anti-Wal-Mart, the company doing right by its workers by paying them higher wages and giving them more benefits and workplace flexibility. However, the positive Costco image took a huge nosedive on Tuesday with the filing of a class action lawsuit on behalf of female employees, who claim they have suffered discrimination in pay and promotions. This places Costco in much the same boat as Wal-Mart, who is also facing a sex discrimination class action, with several of the same lawyers involved in both lawsuits. Only time will tell whether Costco will be able to restore the progressive image it has carefully cultivated.

There have been quite a few “good vs. evil” stories appearing recently which have pitted Costco against Wal-Mart (or sometimes more precisely, Sam’s Club, Wal-Mart’s own wholesale club.) The script goes a little like this: Wal-Mart has become the epitome of market domination (otherwise known as a “category killer”) on its path to becoming the world’s largest retailer, but its success has been at the expense of its employees and the communities in which it operates. The one thorn in its side, however, has been its rival Costco, which continues to dominate the wholesale club market, with its average store’s yearly earnings doubling those of Sam’s Club stores. (See Fortune article.)

The comparisons also extend to the political in this highly charged election season. According to the author, Daniel Gross, in a recent Slate magazine article, Costco is a “blue state,” a Democrat, John Kerry, while Wal-Mart is a “red state,” a Republican, George W. Bush. Not only do Costco’s labor policies swing to the left, Gross notes that “Like today’s Democratic Party, Costco favors highly trafficked urban and edge-city locations—it has three stores in New York City. And it caters to a decidedly upscale crowd.” As for Wal-Mart, “Like today’s Republican Party, it focuses intensely on rural areas and generally avoids cities.” And don’t forget its labor policies, which “are state-of-the-art, for the 1890s.” (See Slate article or listen to NPR audio.) While it may be a tad far-fetched to attach a personal political identity to an apersonal corporation, certainly the comparison holds true when you look at political contributions:

Wal-Mart gives more money to Republican candidates than any other company. Its top three managers, including chief executive H. Lee Scott, donated the individual maximum $2,000 to President George W. Bush, and Jay Allen, vice president for corporate affairs, raised at least $100,000 to reelect the president, earning him the Bush campaign’s designation of ”Pioneer….IRS disclosure records show that Sinegal and Costco chairman Jeffrey Brotman each gave $95,000 last December to the fund-raising arm of America Coming Together, a group organizing voters against Bush, and the Media Fund, which is running anti-Bush advertisements.

(See Bloomberg News article.) Unlike Wal-Mart, Costco pays its workers living wages, has a generous benefit package, and has an turnover rate unparalleled in the retail world: one-third of the 64% industry average. (See Slate article.) Costco’s chairman, James Sinegal, has been quoted saying things simply unheard of in the retail world, such as, “I don’t see what’s wrong with an employee earning enough to be able to buy a house or having a health plan for the family.” Populist commentator Jim Hightower calls Costco “a corporation that breaks the greed mold,” and Sinegal’s approach “shockingly heretical” in contrast to Wal-Mart’s “anti-labor, low-wage, no benefit, ‘move it all to China’ ethic.” (See AlterNet article.) Costco has unions, Wal-Mart doesn’t. Costco’s health care plan covers most of its employees, while Wal-Mart’s plan covers less than half.

In Costco’s corporate code of ethics, one of the basic precepts is “Take Care of Our Employees” accompanied by promises to provide, among other things: “competitive wages; great benefits; and a safe and healthy work environment.” (See Costco Code of Ethics.) And there’s one promise in particular that is sure to get plenty of scrutiny in the days ahead: “An atmosphere free from harassment or discrimination.” Also likely to be much analyzed is Costco’s description of Career Opportunities:

* Costco is committed to promoting from within the company. The majority of our current management team members (including Warehouse, Merchandise, Administrative, Membership, Front End and Receiving Managers) are “home grown.”

* Our growth plans remain very aggressive and our need for qualified, experienced employees to fill supervisory and management positions remains great.

* Today we have Warehouse Managers and Vice Presidents who were once Stockers and Callers or who started in clerical positions for Costco. We believe that Costco’s future executive officers are currently working in our warehouses, depots and buying offices, as well as in our Home Office.

Why? Because a class action has been filed on behalf of female employees at Costco who say it just isn’t so. The lead plaintiff in the case is Shirley “Rae” Ellis of a Denver suburb, who says that she took a salary cut six years ago in order to join Costco, based on the store’s assurances that “she would be eligible for promotion to general manager within a year.” She came to Costco with experience: she had been general manager of a rival Sam’s Club store, making $100,000 to the $50,000 she earned when starting with Costco. (See San Francisco Chronicle article.) Instead, she watched men with less experience receive the coveted general manager openings, while women who were promoted to manager generally were detailed to stores in areas with less revenue, which directly affected their earning potential. (See Los Angeles Times article.) After Ellis complained about her treatment, she was transferred from a nearby store to one much further away, with a 3-4 hour daily commute.

Ellis claims that her experience is typical of women who seek advancement at Costco, and thus her suit is on behalf of about 650 women, both current and former employees at Costco, who were eligible in the last three years for promotion to the top positions. While nearly 50 percent of its employees are women, only 12 percent of its managers are women, and only 2 of its top thirty executives are women. (See Forbes article, and Costco’s list of Executive and Senior Officers.) The “Career Opportunities” practices described above may sound good in theory, but according to Ellis and her attorneys, work to the disadvantage of female employees. “A lot of women don’t even know when to apply for these jobs because they’re not posted,” said Bill Lann Lee, one of Ms. Ellis’s lawyers. “There’s an unfair system of tapping people for these jobs.” (See New York Times article.)

As Brad Seligman of the Impact Fund, counsel in both the Costco and Wal-Mart class actions, points out: “Whatever Costco’s reputation is for dealing with lower-level employees, there’s a black hole involving promotions to its most important and highest-paying jobs.” (See New York Times article.) While it could be years before a court decides whether to certify a class of workers in Costco (it took over two years in the Wal-Mart case), the case certainly creates a large void when it comes to Costco’s carefully cultivated pro-employee reputation.

And there may be more lawsuits to follow. One employment specialist, John Fox of management-side firm Fenwick & West, says “We’re at the threshold of a new 10-year wave of gender-based class action suits.” (See Recorder article.) That fear may be somewhat overstated. As Seligman also points out, “These are difficult, expensive cases to bring.” (See New York Times article.) However, Chairman Sinegal and his mostly-male management team will certainly be taking a good hard look at the allegations raised in this case, as will virtually every large corporation and especially large retailer who wants to avoid becoming a target.

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