Sam Walton Is Rolling in His Grave

When I’m up late, I’ll turn anything on the idiot box rather than have silence. Early Thursday morning, it was Charlie Rose, who was interviewing H. Lee Scott, Jr., outgoing CEO of Wal-Mart (WMT). (During the show, the running gag was that Rose kept reminding Scott that there’s an opening for Commerce Secretary).

There were a few points where I agreed with Scott. For example, he and Rose were noting that the best shouldn’t be the enemy of the good, or, as Scott put it, “in business, you have to be generally correct: you don’t have to be perfect.”

The only problem with that quote was the context, which was instituting new government policies. Since we already expect government to be the captive of special interests, pork barrels, and politicians’ self-protection, lowering our expectations further — from imperfect to mediocrity. I would have felt better if at least he’d identified first principles for economic policy, notably “first do no harm”.

However, I parted ways with Scott (not surprisingly) over one of the few areas he’s praised by left-wing activists: his push for greater government involvement in healthcare. About 26 minutes into the interview, Rose asked him about his views on healthcare.

Scott argued that government should mandate (or provide) healthcare for everyone, rather than impose a mandate only on large companies. Because “91-92%” of Wal-Mart “associates” have healthcare already, he argued that the problem is small business and the self-employed. He predicted that in the next few years “Those of us who have health insurance are going to be at a competitive disadvantage,” i.e. a race to the bottom.

If that point wasn’t persuasive enough, he then argued that a government failure to regulate small businesses would hurt the American economy because “large exporters” like Boeing (BA) would be at a disadvantage. Last time I checked, Boeing doesn’t compete with startups, but rather against a MNC with 50,000+ employees headquartered in the country that brought us socialism.

As a private citizen, Scott may legitimately believe that more healthcare mandates are better. However, as the CEO of the world’s largest company, Scott is not conveying his personal opinion but that of the company he represents.

Scott is holding in trust the seat made possible by the entrepreneurial imagination and tireless efforts of the late Sam Walton. The idea that his successor would advocate more government regulation to hurt competitors must have Walton turning in his grave.

Don’t get me wrong. Scott is no different than any other manager who’s worked his/her way to the top of a big corporation. The selection processes reward politicians (kissing up, making peace), bureaucracy (consummate CYA) or worse yet, the overlap of the two in selective presentation of the truth to influence perceptions.

I realize that a good manager can preserve the value created by entrepreneurs, but the element of personal risk (or value added) is rarely there. Good CEOs are readily available in the labor market (even if great ones aren’t), with the main problem being that boards need to separate competent ones from those who are merely successful politicians. I gather that Scott has been an above-average manager (in an incomparably complex operation) and is now doing a “victory lap” prior to his retirement.

By comparison, entrepreneurs are the ones who create value by doing something that hasn't been done before. They might offer something that people didn’t know they needed, like Steve Jobs, Juan Trippe or Fred Smith. Or they might find a way to deliver it more affordably than customers (or competitors) ever thought possible, like Michael Dell, Herb Kelleher or Sam Walton.

Entrepreneurs often continue as entrepreneurial leaders of their big companies, unless they’re shoved aside on the theory that the company needs a “real manager”. Clearly some founders develop the skills to grow their companies into the Fortune 500. In other cases, the founder grew into the job; it worked out for decades for Microsoft (MSFT) and Wal-Mart shareholders (among others).

Of course, successful entrepreneurs — nothing if not confident — often overstay their time. The visionaries have big ideas for time that has past. In the ICT sector, we see this over and over again — tech entrepreneurs navigating a turbulent era of high uncertainty and high growth find they must cope with commoditized competition where pinching pennies is the norm. Exhibit A would be DEC founder Ken Olsen, the ultimate entrepreneur who failed to cope with the decline of the minicomputer market.

Comments

[jala:]

I cannot add to this. It was very well said.

Jan 17 08:22 PM

[Steven Hansen:]

Joel, health care is a topic everyone has an opinion.

i disagree that it is not in the best interest of wal-mart to have government sponsored health care. in my studies of international trade, export competitiveness of developed countries with health care systems are simply higher because companies do not have to absorb high medical costs.

universal health care should be provided using the japanese approach:

Year 2000 Organisation for Economic Co-operation and Development (OECD) figures show that Japan spends 7.6% of its GDP on health, compared to 9.2% for Canada and 13.1% for the US. In 1998, Japan spent ¥29.8 trillion (US$280 billion) on healthcare, of which 53% was covered by insurance, 32.3% by the government, and 14.8% by patients' co-payments. Officially, the patients' co-payment rate is 20 to 30%, but with co-payments capped, the effective co-payment rate is 14.8%. The cap is at ¥63,600 (US$600) per month, with the average monthly disposable income being ¥561,000 (US$5,300); additionally, there is a low-income cap.

The Japanese healthcare system is highly regulated by the government and, as described by the OECD, "combines a mainly private provision of services with mandatory health insurance. Service providers are paid directly by insurers (the third payer system). Payments for outpatient care are predominantly on a fee for service basis, and inpatient care is paid through a mixture of per diem and fee for service. Fees for different medical services are set out in the Fee Schedule announced by the government and revised every two years. Between 20 and 30% of the fees are born by patients as co-payments. But with a ceiling (see below) the effective co-payment rate is about 14%."

Japanese healthcare providers are predominantly private hospitals and physicians. Hospitals must, by law, operate as not-for-profit entities. About 80% of hospitals are private, physician-owned, and 20% are large, public, state-owned teaching hospitals. In 2000, Japan had 1.9 practicing physicians per 1,000 population, while Canada has approximately 2.1 and the US 2.7.

Jan 17 09:28 PM

[jerico:]

If, in the U.S.A., those who did not work did not eat or if those without money got no health care, then the normal supply and demand principles can be relied up.

Poor people simply starve and poor people die of treatable illnesses. Eventually, there would be no poor people and no problem with health care. Kind of a Darfur sort of deal.

That is not the way it is. Poor people neither starve nor go without health care, they just don't pay for it. Churches, civic organizations, fraternal orders, health care providers and the various governments handle the needs as charity cases.

It is a cumbersome, disorganized, redundant and dollar-dumb jigsaw puzzle of a system.

An organized system administered by government or contractors could do more with less and reduce the cost to hospital emergency rooms hence lowering or containing the cost of treatment.

In my opinion, Lee Scott was right. Only the federal government controls interstate commerce. A workable system must by law must be a federal system so all the states have the same rules, same funding and same policies.

Otherwise, you make no real progress.

Jan 17 09:36 PM

[nutty buddy:]

We learned 95% of what we needed to know when you said that H. Lee Scott actually appeared on Charlie Rose's show ... good grief! The other 5% was the mildly amusing fact that you watched it. Next time try reading Pavda or Time magazine.

Jan 18 08:59 AM

[robinjoe:]

Not that it matters at this point, because the US economy is doomed, but the current heath care system has no negative feedback. I'm a controls engineer and a system without negative feedback is going to explode. By people not actually paying for the services, and it has already gone exponential long enough that only the super rich can afford to actually pay the expense, it disconnects the system from any inhibitions like supply and demand, so it is doomed.
None of the government run health systems have this issue. Plus, we have already determined that access to health care is a basic right, not a service like lawn care. If it is essentially a right, then the government should provide it to everyone and save it from its own excesses. I'm as free market as it gets, but gov't intervention and health insurance make this already NOT a free market.

Jan 18 11:16 AM

[bill d:]

Excellent article .

Ah yes - the view from the top - one has to wonder if the ozygen up there is a llttle thin ?
It would also seem that most of these high powered CEOs are WAY overpaid looking at recent events - hell - anybody can draw big bucks when things are going good. You earn your money when the S**t hits the fan.

Seems to me I recall way back when I first discovered WMT (when I was traveling and saw one I would actually get off the freeway even if I didn't need anything specifically) and they were a GREAT store to go into - every body friendly, clean, etc., that Sam touted the hell out of being, buying & selling American ???
Things have changed - I blame it at the store manager level - if one didn't know better you would swear they have a very powerful employee union. The mostly friendly folks are the gummer/geezers (like me) that are the greeters. Fact is other stores that have unions have way better customer relations.
Sad.

Jan 18 11:22 AM

[A. Nony Mouse:]

Agree with nutty buddy

Jan 18 07:23 PM

[afstall:]

Believe what you want, that is what makes this country great. However, if we continue down our current path the companies and physicians who offer health care goods and services will continue their path to riches on the backs of those who suffer. You cannot keep the present thought process and expect that you wake up tomorrow and things will be better. At some point, someone who can lead our leaders towards change will present us with a health care system that is more balanced. Lee has done a great job of leading Wal-mart through a lot of changes since Sam's passing, all the while taking a lot of criticism along the way. He made some mistakes through the transition, but quickly learned from them to make additional changes that did work.
This is the kind of leadership qualities that this country is begging for. That is evident with the president we elected. If he surrounds himself with people who maintain the status quo, we will continue down the same path we are on now. He should find leaders who know how to make changes and are willing to stand in front of America with a vision.
If selected, Lee would do for America what he has done for Wal-mart during its difficult transition period.

Jan 19 07:45 PM

[Gedankonomist:]

Most extremely wealthy people are socialists.

Jan 20 10:10 AM