Stockholder MeetingSeptember 10, 2006

Do something you enjoy

Rotate positions

The people running the businessare the leaders & they makethings happen

Lead & grow the business

Success is imperative

Running thebusiness right &respect motivatespeople

Lead by exampleStay involved

MentorsTeaching is 90%

Hands-on

Grow managers

Open-door policy

Passion

Work as a team

Coach

Who We Are

Joya HorvathExecutive Vice

President

Shona KoehnVice President of Finance

Cleta SmedleyDirector of Operations

Roy Nelson Vice President of Marketing

Corey Carolina Vice President of Operations

What we will cover today

• The history of our company & CEO

• Theoretical foundation for why we are successful

• How theory affects practice

• What it means for you, the stockholder

• Question and answer

The Costco way…

A history of the company and the man behind it

History of Costco

• Founded in 1982

• Seattle, WA 1983

• 487 warehouses – 8/25/06

• 130,000 employees worldwide

• 47 million cardholders

• Sales $58.9 billion

To continually provide our members with quality

goods and services at the lowest possible prices.

Mission

1. Obey the law

2. Take care of our members

3. Take care of our employees

4. Respect our suppliers

5. Reward our shareholders

Code of Ethics

What Costco Sells

Jim Sinegal - CEO

• Co-founder and CEO• Protégé of Sol Price• Benevolent style of management• Open-door policy• Coach• Only rich on paper• Time Magazine’s 2006 list of The 100 most

influential people

Jim Sinegal - CEO

"Our attitude is that if you hire good people and pay them a fair wage, then

good things will happen for the company."

Why it works…

A theoretical foundation

Trait Theory

• The great man theory

• Oldest approach

• Qualities and characteristics which only great men possess

• Physical characteristics, personality, and aptitudes

Studies of Leadership Traits & Characteristics

Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.

The Style Approach

• Focuses on what leaders do rather than who leaders are.

• Blake & McCanse, 1991; Blake and Mouton, 1964, 1978, 1984 managerial leadership grid.

• Jim’s style is Team Management

Transformational Leader Bass (1985) provided a more expanded and

refined version of transformational leaders that was based on, but not fully consistent with, the prior works of Burns (1978) and House (1976)

Bass’ work gave more attention to the followers’ rather than leaders’ needs

Describes transactional and transformational leaders as a single continuum

Jim Is Transformational

• Concerned with values, ethics, standards, and long-term goals

• Focused on satisfying needs of employees

• Employees trust him

• Engages creativity and innovation

• Employees are confident in achieving goals

Principles of Ethical Leadership

Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.

The Path-Goal Theory • Evans (1970), House (1971), House and Dessler

(1974) and House and Mitchell (1974)

• How leaders motivate subordinates to accomplish goals

• Emphasizes the relationship between the leader’s style and the characteristics of the subordinates and the work setting

• For the leader the challenge is to use the correct leadership style that best meets the subordinates motivational needs

The Path-Goal Theory

Path-Goal Leadership• Defines goals• Clarifies path• Removes obstacles• Provides support

Subordinates Goal(s) / Productivity

Path Motivation

Leader Behavior- Directive- “provides guidance”- Supportive- “provides nurturance”- Participative- “provides involvement”- Achievement oriented- “provides challenges”

Obstacles

Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.

Leader-Member Exchange Theory

Roles

Influences

Exchanges

Interests

Scripted

One-Way

Low quality

Self

Tested

Mixed

Medium Quality

Self/other

Negotiated

Reciprocal

High Quality

Group

Stranger Acquaintance Partner

Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.

Leader-Member Exchange Theory

Leadership Making• Graen & Uhl-Bien (1991)

• A prescriptive approach to leadership that emphasizes that a leader should develop high quality exchange with all subordinates

• Suggest that leaders should create networks of partnerships throughout the organization

What the numbers say…

A comparison to Sam’s Club

Higher Pay = Lower Turnover• Average Costco Wages:

$35,360 per year ($17/hour)

Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club. Academy of Management Perspectives, 20(3), 26-37.

• Average Sam’s Club Wages: $21,028 per year ($10.11/hour)

$0

$5,000

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$15,000

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$35,000

$40,000

Dol

lars

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CostcoSam's Club

Higher Pay = Lower Turnover

Costco Employees & Turnover

67,600

11,492

Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club. Academy of Management Perspectives, 20(3), 26-37.

•Costco Turnover:17%/year

•Sam’s Club Turnover:44%/year

Sam's Club Employees & Turnover

110,200

48,488

Lower Turnover = Lower Cost

• Estimated Costco Turnover Costs: $21,216 x 11,492 employees = $243.81

million

• Estimated Sam’s Club Turnover Costs: $12,617 x 48,488 employees = $611.77

millionCascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club. Academy of Management Perspectives, 20(3), 26-37.

Higher Pay = More Productive Employees

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900

Dollars

Sales per Employee per Square Foot

Sam's Club

Costco

Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club. Academy of Management Perspectives, 20(3), 26-37.

More Productive Employees = Higher Net Sales

Data taken from each company’s 2006 monthly sales reports

6-Month Sales Comparisons

$0.000

$1.000

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$6.000

$7.000

March April May June July August

Month

Do

llar

s (i

n b

illi

on

s)

Costco Sam's Club

What You Really Want to Know

Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club. Academy of Management Perspectives, 20(3), 26-37.

Wrapping Up…

What does it all mean?

Conclusion

• Innovative company built on values

• Jim Sinegal the Dynamic Leader

• Killing the competition with Kindness

• Stock is ripe for the picking

Question & Answer