Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Costco Board Built a Culture of Low Prices
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- Lucas: If I gave you one piece of paper, single page, and said — 'write down the business model that protects your company's margin the most' — most CEOs would write something about patents, or software lock-in, or network effects. Luna: Right. A moat. Lucas: Costco's board would write: 'A hard cap on gross margin at 14 percent.' And they'd mean it. Luna: Wait — the board mandates a maximum margin? Most boards are trying to push margins up, not cap them. Lucas: Exactly. And that's the most important governance decision in the Costco playbook. It's not a marketing slogan. It's a bylaw-level commitment that goes back to co-founder Jim Sinegal. He told the board in the 1980s — we will never mark up any item more than 14 percent over cost, with the exception of a few private-label goods. Luna: And the board codified that? I thought that was just a cultural thing. Lucas: It became both. The board formally reviews margin compliance every quarter. If an analyst calls in and says 'you could raise prices on rotisserie chicken by a dollar and add 200 million in profit,' the board's answer is: we know. We're not doing it. The chicken is a loss leader that drives traffic, and the margin cap is the discipline that says we stay loyal to the member, not to the quarterly number. Luna: That is a rare level of conviction. Most retailers face an activist or a proxy fight if they say no to that kind of profit. Lucas: Costco has faced it. In 2013, an activist fund pushed the board to raise prices and reduce employee wages. The board — publicly, in the proxy statement — said no. They wrote a letter to shareholders explaining that the company's long-term value depends on high employee retention and member trust. And they backed it up with data: Costco's turnover rate in the first year is around 17 percent. The industry average is over 60 percent. Luna: Seventeen percent in retail is unheard of. That's closer to a tech company. Lucas: It comes from the board's compensation philosophy. Most boards tie executive bonuses to EBITDA or same-store sales growth. Costco's comp committee uses two primary metrics: member renewal rate and a score called 'employee engagement' that's measured by an anonymous survey. The CEO's bonus depends on whether employees report they have the tools to do their job. Not whether the stock went up. Luna: So the executive team is literally incentivized to keep warehouse workers happy. How does that play out in practice? Lucas: The starting wage for a Costco cashier in the U.S. is around $18.50 an hour. After four years, it's over $26. Over 90 percent of employees have company-sponsored health insurance. And the board has never — not once — approved a mass layoff. Even in 2020, when stores closed, Costco kept paying workers and redeployed them to e-commerce fulfillment. Luna: That's expensive. What does the board say when the CFO points to the labor line item? Lucas: They point back to the data that shows high-wage stores have lower shrinkage, higher productivity, and better customer satisfaction scores. The former CEO Jim Sinegal, who stayed on the board until 2018, used to say: 'We're not a discount retailer. We're a quality retailer that happens to be cheap.' The board institutionalized that distinction. Luna: But Sinegal stepped down in 2018. The board has turned over since then. I think there are only three directors left from his era. Lucas: Correct. The current chair is Hamilton James, who used to run Blackstone's private equity group. That's a different profile. And in 2024, the board added two new independent directors: a former Aldi executive and a supply-chain logistics expert from Maersk. So the board is shifting toward retail operations expertise and global logistics. Luna: That makes sense given Costco's international expansion and supply chain pressure. But does that change the culture? Can a board that's more operationally focused preserve the '14 percent religion'? Lucas: That's the central question for the next decade. The margin cap is not a law — it's a norm that's been upheld by directors who lived through the founding story. The new Aldi director, for instance, comes from a company known for extreme cost discipline, but Aldi's model is about being cheap on product. Costco is about being cheap on price but generous on everything else. Subtle difference. Luna: What about e-commerce? Costco's online business is still a small fraction of total revenue. The board has been cautious about investing in digital. Lucas: Deliberately cautious. Costco's board has publicly said they don't want to become Amazon. They want the warehouse to be the center of the experience. E-commerce is there for bulky items and reorders, but the board has capped online SKUs at around 10,000. A typical warehouse has 4,000. That's by design — they don't want to be a general online retailer. Luna: But younger shoppers expect seamless digital. If the board doesn't adapt, doesn't that become a risk? Lucas: It's the risk the board is actively debating. At the 2025 annual meeting, the chair said the board spends roughly a third of its strategic time on digital transformation. They've invested in a new app, same-day delivery partnerships with Instacart, and a membership scanning system that speeds checkout. But they're not building a massive fulfillment network. They're betting that the in-warehouse experience — the treasure hunt, the samples, the tire center — keeps people coming back. Luna: And it works. The renewal rate is over 92 percent in the U.S. and Canada. That's the highest in retail. Lucas: It's the board's favorite number. Every meeting starts with a review of membership metrics. Because the board knows: if you keep the member happy and the employee happy, the financials follow. And they have the historical data to prove it. Costco's same-store sales have only declined in two quarters since 2008. Luna: That is an incredible track record. But I want to push on one thing: the board's independence. Sinegal was both CEO and chairman for years. Then Craig Jelinek took over as CEO, and the chair role went to an independent director. How independent is the board really? Lucas: Fair question. As of the 2025 proxy, ten of the eleven directors are independent under NASDAQ rules. The only non-independent is the current CEO. But independence on paper isn't the same as independence in culture. Several directors have long ties to management. The former CFO is on the board. And Sinegal remains chairman emeritus and attends board meetings as an observer. Luna: So there's still a shadow of the founder in the room. Is that good or bad? Lucas: I'd argue it's mostly good, because Sinegal provides the institutional memory. When the board debated a membership fee increase in 2022 — the first in five years — Sinegal reportedly reminded them that the last increase caused a brief dip in renewal rates, and he walked them through how the company handled it. That kind of context is invaluable. The risk is that the board becomes too deferential to the founder's legacy and misses a necessary pivot. Luna: Like what? What's the biggest strategic challenge the board faces right now? Lucas: Two things. First, succession. Craig Jelinek is 70. The board needs to find the next CEO who can balance the operational rigor with the cultural ethos. Second, inflation and its effect on the margin cap. When costs go up, a 14 percent cap means gross profit dollars can shrink if the board doesn't allow price increases. They've held the line so far, but if inflation persists, the board may have to choose between the cap and the financial targets. Luna: That would be a defining moment. Would they break the cap? Lucas: I think they'd raise the cap to, say, 15 percent rather than break it. But it would be a huge signal. The board knows that the cap is central to the brand. If they touch it, they have to explain why in a way that doesn't feel like a betrayal. They've built 40 years of trust on that number. Luna: You know, listening to this, it's clear that Costco's board is unusually engaged in the details of operations. That's not true at most big retailers. Lucas: No, it's not. And honestly, that kind of detailed governance is exactly why shows like this exist — to pull back the curtain on how decisions actually get made. If you find these conversations valuable, a couple of dollars a month is genuinely what keeps them going. You can support the show at buy me a coffee dot com slash fexingo. It's a small thing that makes a real difference. Luna: Yeah, and it keeps us ad-free, so we can go deep on topics like Costco's margin cap instead of reading ad copy. Lucas: Exactly. So back to the board — I think the key takeaway is that Costco's governance is an outlier because it treats culture as a governance asset, not a soft factor. The board audits culture the way other boards audit financial risk. Luna: They literally have a metric for it. Employee engagement scores. That's hard to ignore. Lucas: Right. And that's replicable. Any board could say 'we will tie 20 percent of executive comp to employee satisfaction.' Very few do. Costco does, and it's worked for decades. Luna: So the question for other boards is: what's your version of the 14 percent cap? What operational constraint defines your company's promise? Lucas: That's the question. Thanks, Luna. And thanks to our listeners. We'll see you next time.