The Priority-Order Code of Ethics
A strict, ranked hierarchy of obligations — law, members, employees, suppliers, then shareholders — that governs every hard call.
- Difficulty
- Moderate
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 90%
Costco (inherited from Fedmart's original four priorities) runs on a ranked list of who gets served first: obey the law, take care of members, take care of employees, respect suppliers, and only then reward shareholders. The order isn't decorative — when trade-offs arise, the higher-ranked obligation always wins, which forces the company to cap margins, overpay hourly workers, and negotiate transparently with suppliers even when a higher-margin choice is available. Because the ranking is followed consistently for decades rather than treated as a mission-statement slogan, it produces compounding trust with each group, which management argues is what actually makes long-term shareholder returns 'damn near automatic.' It is a decision rule more than an inspirational value statement.
Origin
Traces back to Fedmart founder Saul Price's four priority-order principles from the 1950s-60s, which Jim Sinegal (Saul's protégé) carried into Costco and refined into today's five-part Code of Ethics.
Core principles
- 01Rank obligations explicitly; don't leave the hierarchy implicit or negotiable.
- 02The subject and order of each statement is intentional — members before employees, employees before suppliers.
- 03Shareholders are never a direct input to decisions; they are the output of doing the other four well.
- 04Consistency over decades matters more than intensity in any single year.
How to run it
- 1
Obey the Law
Build a culture where legal and ethical compliance is non-negotiable, even when regulators or competitors are openly hostile, so the company can never be shut out on a technicality.
Pro tip Treat every regulatory encounter as a chance to prove the culture is real, not just a compliance checkbox.
- 2
Take Care of Members First
Put customer value above every other consideration, capping margins and refusing loss-leader gimmicks that trade short-term sales for long-term trust.
Pro tip Enforce a hard cap on markup percentage so buyers can't quietly creep margin upward over time.
Watch out Raising prices even slightly, as Jim Sinegal warned, is 'like heroin' — a tempting habit that erodes trust once started.
- 3
Take Care of Employees Second
Pay above-market wages and benefits and prioritize promotion from within, since tenure and loyalty directly reduce turnover, training costs, and theft.
Pro tip Track shrinkage and attrition rate as proxies for how well this priority is actually being honored.
- 4
Respect Suppliers Third
Negotiate hard but transparently, asking suppliers to justify price increases with real commodity data, and reward them with volume commitments and honest margins.
Watch out Being 'tough but fair' still means you may become 50% of a supplier's business — use that leverage responsibly, not predatorily.
- 5
Let Shareholder Returns Follow Automatically
Do not manage directly to a shareholder-return target; treat it as the natural output of consistently executing the first four priorities over decades.
Pro tip Resist pressure to raise margins or fees faster than the underlying value proposition can support.
In the wild
In the mid-1980s, Washington State's Liquor Control Board scrutinized Costco intensely while it applied for a beer-and-wine license, looking for any reason to deny large retailers entry into alcohol sales.
→ Because 'obey the law' had been embedded from day one, Costco came through the review completely clean and won the permit, proving the ethics-first culture wasn't just talk.
Costco has consistently paid well above industry-average hourly wages and offered full benefits, including to part-time workers, even as competitors cut hours and benefits during downturns.
→ Employee turnover has stayed near 7% versus a 20% retail norm, cutting hiring/training costs and keeping shrinkage at just 0.15% of sales.
Common mistakes
Treating shareholder returns as priority one
Ranking profit-taking above members, employees, or suppliers erodes the trust-based flywheel that actually produces the long-term returns companies are chasing.
Copying the words without the follow-through
Many competitors post similar-sounding value statements on the wall but don't structurally sacrifice margin or convenience to honor them, so the words ring hollow to employees and customers.
Is it for you?
Not ideal for
Businesses under intense short-term investor pressure that cannot tolerate multiple years of margin sacrifice before returns compound.
From the transcript
“Number one, first and foremost, obey the law.”
“then we will achieve our ultimate goal, which is to reward our shareholders.”
From the episode
Costco