Legal Commentary

On Saturday Joe Nocera had a nice column on the retirement of Herb Kelleher, long-time chief at Southwest Airlines.  The fest came at Southwest's annual meeting, which overflowed with shareholders and employees expressing their admiration for the departing chairman.  The Southwest pilot's union even thanked Kelleher in a USA Today ad.

Given these displays of admiration from employees, particularly in the contentious airline industry, one might expect Kelleher to be a fan of Southwest employees.  In fact, he gives them the credit for the success of the company:

Over the years, whenever reporters would ask him the secret to Southwest?s success, Mr. Kelleher had a stock response. ?You have to treat your employees like customers,? he told Fortune in 2001. ?When you treat them right, then they will treat your outside customers right. That has been a powerful competitive weapon for us.? As he stepped away from the company this week, his line didn?t change.

?We?ve never had layoffs,? he told me the day before the annual meeting, sitting on the couch of the single messiest executive office I?ve ever seen. ?We could have made more money if we furloughed people. But we don?t do that. And we honor them constantly. Our people know that if they are sick, we will take care of them. If there are occasions or grief or joy, we will be there with them. They know that we value them as people, not just cogs in a machine.?

Can that really be the reason Southwest is still making money while its competitors are bleeding red ink? Can it really be that simple?

Of course, it's probably not that simple.  Nocera notes other potential keys to Southwest's success: it got its start by operating out of Love Field in Dallas and operated as a new kind of carrier; it expanded during the great bull markets in the 1980s and 1990s; and it recently made savvy fuel hedges that save the company about 60% off its oil costs.  Undergirding these successes, however, was a constant philosophy of the importance of employees.

Of course, critics of an employee-centric approach will point to United Airlines, which had much less success during a period of actual employee ownership.  The United ESOP has a complicated story, but it must nevertheless be recognized as an instance of failed employee ownership.  But that failure should be contrasted with successes like Southwest.  Although Southwest has never been employee-owned, Nocera notes that during its growth years, "[m]uch of [the Southwest] stock was in the hands of employees, because Mr. Kelleher believed in handing out stock options liberally."

The notion that "employees are important" is one of those Successories-type sayings that seems to have little meaning.  But Southwest shows that the saying can be operationalized into a business approach that provides a competitive advantage.   "Employee primacy" has yet to be developed into a competing theory of corporate law.  But perhaps  Southwest will be a useful example in our efforts to better understand the dynamics and potential of the corporation.