The Principle of Leading by Example

 

The Principle Series

 

 

While reading “The 21 Laws of Irrefutable Laws of Leadership” by John C. Maxwell, I was surprised at The Law of Addition, which discusses adding value by serving others. Most notable was the example used: Jim Sinegal, former CEO of Costco. From founding the company to his tenure as CEO, he operated under a different set of ethics, and it was refreshing to read. Since then, I’ve taken to doing some additional research about him, his operating mindset, and his approach to business. I appreciate what I’ve read about his intentionality – and, surprisingly, I’ve also been able to glean from the criticisms against him, too (detailed below).

Easy to say but difficult to live out, Sinegal and his leadership approach embodied The Principle of Leading by Example. Although he retired from Costco in 2011, there is still a lot we can learn from him. Let’s take a look and unpack it a bit to see what I mean.

 

The Principle of Leading by Example Defined

 

First, let’s begin by actually defining The Principle of Leading by Example.

In its shortest form, leading by example means you are unwilling to ask someone to do something you wouldn’t do yourself; it’s doing things others are hesitant to do; it’s taking burdens upon yourself; it’s recognizing that as a leader, you often carry burdens others do not – by now, the picture should be clear.

You’re out in front, providing, being, and leading by example. What’s more, you intuitively know what that looks like, too. I suspect everyone reading can recall someone who inspired them when they led by example.

What’s particularly inspiring is, in many cases, it’s not who you’d think, either. It’s often someone obscure: shoulders down, focused on what to do – and THAT inspires others. I’m reminded of what Billy Graham said, here:

 

“When a brave man takes a stand, the spines of others are often stiffened.”

 

When someone leads by example, the spirits of others are restored. They are strengthened, influenced, inspired, and cynicism – that negative trait so prone in others where leaders are concerned – evaporates.

That is The Principle of Leading by Example.

 

The Art of Intentionality is Foundational

The Principle of Leading by Example has Intentionality at its foundation

 

First and foremost, Jim Sinegal was intentional about his approach to leadership. Recall that in The 4 Indispensable Qualities of a Leader, I outline how intentionality is foundational – you will be anemic at best if you are not intentional about doing things. In this case, for example, it’s leading – as it should. Sinegal, when starting out, gleaned from others as he honed his leadership and, once he founded Costco, used those same lessons to drive his style. He was intentional about his approach, the way he was perceived, and how he understood business.

 

The Principle of Leading by Example

Let’s analyze Leading by Example

 

Sinegal, having learned from Sol Price (the founder of Price Club), was a pioneer with the Principle of Leading by Example.

For starters, it was important he not take on the exorbitant salaries other CEOs are known to have. Consider his words:

 

“I just think that if you’re going to try to run an organization that’s very cost-conscious, then you can’t have those disparities. Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong.”

 

Sinegal, while CEO, had a salary that was $350,000 a year. EPI, researching the top 350 firms in America, CEO compensation averaged 27.5 million.

By comparison, there are several articles that state the ratio of CEO to employee pay is a whopping 272 to 1. Here is one.

What’s more, EPI reports that “CEO pay has skyrocketed 1,460% since 1978.”

In addition to his intentional approach of leading by example and not gouging those who worked for him, he also provided robust compensation and benefits, too – to the ire of some – like Peter Drucker.

If you don’t know who Peter Drucker was – and I suspect many do not – he was widely considered the father of modern management and a superb intellect.

While reading Managing in the Next Society – written in 2002 (book review to come) – I read the following:

 

“What is your critique [of Capitalism]?

I am for the free market. Even though it doesn’t work too well, nothing else works at all. But I have serious reservations about capitalism as a system because it idolizes economics as the be-all and end-all of life. It is one-dimensional.

For example, I have often advised managers that a 20-1 salary ratio is the limit beyond which they cannot go if they don’t want resentment and falling morale to hit their companies. I worried back in the 1930s that the great inequality generated by the Industrial Revolution would result in so much despair that something like Fascism would take hold. Unfortunately, I was right.

Today, I believe it is socially and morally unforgivable when managers reap huge profits for themselves but fire workers. As societies, we will pay a heavy price for the contempt this generates among the middle managers and workers.

In short, whole dimensions of what it means to be a human being and treated as one are not incorporated into the economic calculus of capitalism. For such a myopic system to dominate other aspects of life is not good for any society.” – Pages 149, 150

 

For what it’s worth, I agree with Mr. Drucker and believe he hit the nail on the head. What’s more, it’s very interesting to see someone who operated within the framework of the capitalistic economic model, consulted numerous companies, and has come to this conclusion.

Jim Sinegal thought along the same lines, too.

 

All the way back in 2006, Harvard Business Review reported that the average wage at Costco was $17.00 an hour. Wal-Mart didn’t post Sam’s Club wages, but the average wage for its (Wal-Mart’s) employees was a paltry $10.11.

That’s a 70% increase.

What’s more, a 2005 article from the New York Times reported Sam’s Club wages at $9.86, and a 2004 article from BusinessWeek had it at $11.52.

In that same HBR article, compensation is also spelled out:

“On the benefits side, 82% of Costco employees have health-insurance coverage, compared with less than half at Wal-Mart. And Costco workers pay just 8% of their health premiums., whereas Wal-Mart workers pay 33% of theirs. Ninety-one percent of Costco’s employees are covered by retirement plans, with the company contributing an annual average of $1,330 per employee, while 64% of employees at Sam’s Club are covered, with the company contributing an annual average of $747 per employee.”

That’s a significant difference, and Jim Seingal, the man at the helm, had intentionality at the core of this.

He even had an open-door policy – quite literally – since his office didn’t have a door to speak of!

Instead, it’s reported that when people came to corporate headquarters, he’d meet them at the reception desk. He was also known to answer his phone, “Sinegal!” when it rang, and he had folding chairs in his office. It’s a remarkable thing to enter the lion’s den of success and not be swallowed by it – something Sinegal seems to have been able to pull off.

Lastly – and just as remarkable, to be honest – Sinegal didn’t lay off any full-time workers during the Great Recession beginning in 2008. During a time when so many others cut the meat to the bone, Costco was able to retain employees, customers, and keep things on the rails.

Color me impressed.

 

The Principle of Leading by Example Results

The results of Leading by Example are substantial

With the above in mind, it’s clear that Sinegal led by example. He thought it unconscionable to have the disparity other CEOs had (and still have). He believed in compensating people well – and he convinced others of his belief by actually doing it.

There are many examples of people simply talking about things but never actually doing them. I see it all the time with safety; too many tell me and others, “Safety first,” but what I want to see is your company culture. Don’t tell me – show me.

I could say the same about valuing employees, too: LinkedIn is FULL of examples where companies spend, pay, and allocate more for new talent – and then seem to be taken by surprise when current employees leave.

It’s the classic example of “do what I say, not what I do.” Companies do it ALL THE TIME, and somehow never really understand that labor rates (including compensation) do not always equal labor costs.

How?

Turnover – that’s how. Using data from back in 2006 (because we are highlighting Sinegal’s Leading by Example), turnover was at 17% – and an astonishing 6% after one year. Wal-Mart’s was at an industry average of 44%.

Yeah, you read that right.

When you spend that much time/money, and energy towards constantly recruiting, onboarding, and replacing people, it affects your bottom line in just about every way. And what Sinegal did, by living out The Principle of Leading by Example, is demonstrate that people truly matter. While other companies, associations, institutions, and even industries tout empty rhetoric, Sinegal put action to words.

 

The Principle of Leading by Example Pushback

Pushback for Leading by Example? Yes, indeed

 

While reading and researching, I was genuinely surprised to discover Sinegal had critics. There were those who believed he should have paid his employees less, squeezed them more, and prioritized shareholders.

The HBR article from above has an analyst quotes as saying, “It’s better to be an employee or a customer than a shareholder.” The New York Times details some criticism, too. The Wall Street Journal tried to coin it as “Costco’s Dilemma: Be Kind To Its Workers, or Wall Street?” ABC News reports that “Sinegal is unfazed by his critics. ‘Wall Street is in the business of making money between now and next Tuesday,’ he said. ‘We’re in the business of building an organization, an institution that we hope will be here 50 years from now. And paying good wages and keeping your people working with you is very good business.'”

It’s remarkable that the ONLY criticism comes from Wall Street. It also gives you a glimpse of how they – analysts, “conventional” companies, and unfettered capitalism as a whole – believe the market should operate. The shareholder is, in their own words, the only one who truly matters. Not the workers – who provide the labor needed to actually make money and bring customers, nor the customers, themselves – who are needed to continue spending their money, but the shareholders.

If this seems odd to you, then you aren’t alone. Peter Drucker, in his fantastic book, Managing in the Next Society, wrote:

 

“I once was a securities analyst, so that gives me license to say that it is virtually impossible to make a financial person understand business. I am not being facetious. Financial people don’t deal with the issue of balance between often conflicting elements – short term versus long term, continuity versus change, improving today versus creating tomorrow. Corporate leaders who wrestle with these issues every day know the amount of struggle involved, but it’s difficult for financial people to understand this…One of the most critical jobs ahead for CEOs will be to think this all through in relation to their particular business and come up with ways to strike reasonable balances.” – Pages 80, 81

 

Sol Price, Sinegal’s mentor, remarked, “Jim has done a very good job in balancing the interests of the shareholders, the employees, the customers, and the managers. Most companies tilt too much one way or another.”

And here is – at least to me, anyway – one of the main takeaways when we look at The Principle of Leading by Example: despite your best efforts, you can, and sometimes will, find yourself at odds with just about everyone at one time or another. You may attempt to be as balanced as possible, and you may even achieve that balance, or some semblance of it, anyway – but there is a real possibility someone, somewhere, has a problem with what you’re doing. And, in this case, it flies in the face of “conventional” capitalism.

Profits are, as far as the market is concerned, the most important thing – people be damned. Squeeze them for everything you can, get blood from a turnip, and upset the apple cart with tenure, satisfaction, and increased hiring/retention costs.

Perhaps capitalism needs internal reform. Peter Drucker was skeptical of the broad application of a one-dimensional model. He isn’t the only one who’s talking about this, and for my part, I think we should have some serious conversations going forward. We are going to be experiencing tight labor markets for the next two decades, and I think numerous industries are in for a rude awakening. The old mentality and capitalistic approach will be tested, and new strategies become more commonplace.

The BEST article I’ve read to this point on Sinegal and his approach to Costco’s business model is here at Masterinvest. It’s really detailed and has a wealth of good quotes from investment giants like Charlie Munger, Nick Sleep, and Sol Price – who was Sinegal’s mentor.

 

The Principle of Leading by Example Takeaways

The key to it all

 

One key takeaway was already mentioned: the fact that no matter what you do, how hard you strive, or the effort you put into everything, there will always be naysayers and negative people.

The question then becomes, do you become a product of your environment – or will your environment be a product of you?

You already know the answer to that.

A second key takeaway is that when we embody The Principle of Leading by Example, it doesn’t matter what people say about us – and this is true whether the noise is good or bad. We don’t do it for the praise; the mission itself is worth the endeavor.

Another key takeaway is that when The Principle of Leading by Example is in play, you don’t just influence others – you inspire them, too. This will be discussed in more detail later on in the future, but think about it: Who are the people in your life who have been stellar leaders? The ones who have not only influenced you but also inspired you to do something yourself? What can be said when we recall the amazing inspiration those leaders were to us?

You see, it’s one thing to influence someone to adopt our vision and mission – it’s another thing entirely to have them embrace theirs. When you reach that level, you are maximizing The Principle of Leading by Example.

 

Conclusion

 

The Principle of Leading by Example has tremendous power. Indeed, most can recall those we know who embody this principle to its fullest extent. Perhaps it’s someone famous. It could be they are well-known in a particular industry, field, occupation, or sphere. Maybe it’s someone who is an aspiring leader – or it might be someone you’d never think of.

What I’ve seen, though, is the person who embodies it the best remains undetected and under the radar; they don’t seek and often don’t receive any fan fare for what they do. They lead by example because they know it’s the right thing to do – and it’s how you get others to truly buy into what you’re doing.

So, Project Manager, how are you doing with this principle? What about you – Superintendents? What say you, Foremen? Are you living by The Principle of Leading by Example?

How about you, business owners? Consultants? This applies to “professionals” (I use that term LOOSELY, by the way), white-collar workers, and office personnel in general, too.

The Principle of Leading by Example doesn’t discriminate – it’s available to all and for all – IF you will adopt it in your life.

So, what are you waiting for?