The Costco Way: A Conversation With Tony James

In early 1983, Hamilton “Tony” James, head of the global mergers and acquisitions group at boutique investment bank Donaldson, Lufkin & Jenrette (DLJ), met in his New York office with Jim Sinegal and Jeff Brotman. The cofounders of a startup in Seattle called Costco were looking for Series A funding. James greenlighted the investment, did a second, larger Series B round, organized the company’s IPO in 1985 and joined its board in 1988. He’s still on it, serving as chair for the past seven years.

Other than Sinegal and Brotman, arguably no one has been more important to Costco than James. His peerless business sense and career and matchless social and political connections gave him rare insight into vacillating geopolitical and macroeconomic trends. He turned down President Obama’s offer to be his Commerce Secretary in 2012 and was formerly a member of President Biden’s Intelligence Advisory Committee and co-chairman of the Metropolitan Museum of Art. “When you have someone pretty damn smart who has all this inside information on what’s going on in the world giving you advice, what an advantage that is,” Sinegal told me.

James graduated magna cum laude from Harvard College in 1972 and earned his MBA at Harvard Business School two years later. His father, Hamilton R. James, former president of management consultancy Arthur D. Little, is credited with building the firm into a leader in its field in the 1980s. The apple didn’t fall far from the tree. In a page-one Wall Street Journal profile of James in 1986, he was called “one of a new breed of ‘merger whiz kids.’” In 1995, he was appointed chairman of DLJ’s banking group. Five years later, he orchestrated the firm’s $11.5 billion sale to Credit Suisse First Boston, becoming chairman of global investment banking and private equity. In 2002, he joined Blackstone as vice chair, transforming the private equity firm into the world’s largest alternative asset manager, with more than $1 trillion in assets under management.

The former startup that James greenlighted 42 years ago when it was just an idea is a colossal business today, with $249.6 billion in FY 2024 sales, more than 132 million customers, over 316,000 employees and 891 warehouse stores worldwide, 276 of them in Canada, Mexico, Japan and 10 other countries. The company holds the No. 11 spot in the Fortune 500. As the late Charlie Munger, another longtime Costco board member, famously said, “I wish everything else in America was working as well as Costco does.”

Tony James is an important reason why. Over the course of three Zoom interviews, he elaborated on Costco’s founding, the permanence of the company’s core values, its international expansion, competition from Amazon, recent talent decisions and, especially, the unique entity that is Costco’s board, whose chair and directors strive mightily to do right by Costco’s members and employees in a world of rapid change. Excerpts of those conversations, edited for length and clarity, follow.

You’ve been involved with Costco almost since the beginning, leading the three-person team at DLJ in New York that evaluated its potential in early 1983. What was it that intrigued you about the business?

DLJ, back in the early ’80s was a small firm, and we looked for smaller growth-oriented companies. It was my team’s job to find “up and comers,” but I don’t want to imply that we were the smart ones and could pick the next great company. We knew some venture capital firms and early-stage investors and through that network, Jim Sinegal and Jeff Brotman got connected to me. They came to New York and introduced themselves. They had this idea of a membership-only retail warehouse company similar to Price Club and handed me a research report from Goldman analyst Joe Ellis describing the Price Company. There was nothing else like it at the time. When you make that kind of bet, you make it on the management team. They seemed like great guys. Their enthusiasm was certainly high. I said, “Okay, we’ll round up the money for you.”

Aside from them being great guys, what else impressed you about Costco’s cofounders?

You couldn’t have a better combination. Jim knew the business cold, having essentially run The Price Company [as executive vice president]. Jeff, a lawyer, grew up in the Pacific Northwest and knew the local real estate and retail scenes. His family ran a chain of men’s stores called Jeffrey Michael.

As I understand it, DLJ then did the Series B round. In terms of early-stage investing, it seemed pretty easy.

It didn’t require huge leaps of faith, that’s true. We didn’t have to guess what the market would be, will the technology work, who the customer was or how they would make it. We felt if the concept was good, it would work not just in one location but all over.

Did you join the board at the get-go?

Jim and Jeff wanted me to, but they were on one side of the country in Seattle, and I live in New York City. I was invited to go to all the board meetings and went to most of them or sent my people, like Steve Lebow and Richard Galanti [who became Costco’s CFO in January 1985]. It took off right away, and I started getting excited. I kind of fell in love with the company and the management team, and a few years later [in August 1988], I became a board director, and then lead independent director in 2005. When Jeff died in 2017, I became chairman.

In your time on the board, how would you describe its governance?

Well, that’s a long time. In the first few years, none of us knew what we were doing; we were feeling our way. It was a lot more casual. In the last 30 years, governance was more consistent. Our primary job was to make sure we had great management and not tell them what to do or get in their way. We were always mindful of staying in our lane. That was No. 1. Obviously, we had an incredibly execution-focused business. The margins were razor thin, but the volume was huge. As we built locations all over the country and the world, the turnover of inventory was massive. These were things the board never wanted to change, but at the same time, our role is to help management see around the corners a bit.

Could you elaborate?

Well, there isn’t much time for a management team with a maniacal focus on day-to-day details to think grandiose thoughts about where the company will be in five or 10 years. The board always played a role helping management step back from the day-to-day frenzy to think a bit about the long-term future, asking the questions to help them see around the corners.

Costco is a public company and, like all public companies, has short-term shareholder pressures. Stock analysts will always ask why last quarter’s sales were up or down and what the next quarter will look like. Did the board compel management to consider Costco’s stock price in its decisions?

No, we never focused on that, and management didn’t either. The board has always been a bulwark from short-term pressures, giving [management] a safe space and support to build a great long-term business. We protected [management] from the short-term pressures public companies have these days.

That’s unusual for a board.

I know. We gave them permission, in a way, to do the right things for Costco’s members no matter what, to take care of them, the employees and our suppliers [Costco’s core values]. The board would never do anything to compromise those higher priorities, believing they benefitted shareholders by building a great and lasting company. The board was always 100 percent comfortable with that.

Earlier you mentioned Richard Galanti, who announced his retirement as Costco’s CFO a few months ago. Was he a factor in keeping the stock analysts happy?

Richard was the face of the company and was very good at dealing with the analysts. It’s remarkable how little other executives participated in the earnings calls. Jim didn’t spend any time doing that, and neither did Craig [Jelinek, Costco CEO and president from 2012 to 2023]. Richard was given that mandate. He did not provide earnings guidance, freeing management to run the business as it should be run instead of making a promise you then have to deliver on.

Can you open the curtain a bit on board meetings, discussions and decision-making?

We’ve always had a very engaged board. The nice thing about having a small number of talented board members, eight or nine directors give or take, is it allows for close engagement. We’re very interactive with each other and with management. We request board notes in advance of meetings, and we all read them. When the presenters get up to talk on a topic, we’re prepared to have an interactive discussion. That’s something we all look forward to. Not only is it beneficial in terms of our understanding [of the topic], it makes it more enjoyable to be a board member. There’s a magic to being interactive without being prescriptive, finding that balance.

Can you provide an example of when the board helped to strike this balance?

There are many examples. One that comes to mind is China. Several times we encouraged the company to think about opening a store in China. “We know you have plenty on your plate and tons of near-term work, but China is a big prize, and we think it’s important,” we said. [Editor’s note: In 2019, management opened the company’s first store in China, which caused a well-publicized public frenzy, traffic jams and an early close the first day. A sixth store opened in early 2024 in Shenzhen.]

Has the board engaged in discussions with management involving capital allocation?

Over the years, we’ve had lots of discussions about whether to own real estate or lease it. Management prefers to own if it can get the right locations. Some shareholders think that’s a waste of capital, that we should sell the real estate [Costco owns] or sublease it. But one of the very powerful reasons to own real estate is that the fixed costs are way down. If the site isn’t right, we can get rid of it or remodel it anyway we want, without a long lease. The board has always felt this operational flexibility was a worthwhile use of capital. Certainly, the value of the real estate has appreciated rapidly year-over-year. It’s just another example of management doing the right thing for shareholders, despite short-term pressures.

Costco historically pursued joint ventures in expanding globally, but now appears to prefer foreign direct ownership and is buying out JV partner shares all or in part in Mexico, the UK and Taiwan. How involved has the board been in these decisions?

Management makes the decision, but we’re a sounding board, helping them make better and quicker decisions. We’ve had plenty of discussions about international expansion. In the beginning, the company ran lean in terms of management, which was a competitive strength. As we started moving into other countries, a lot of it was done with a local joint venture partner. We don’t do that anymore. We want to control our own destiny, completely. We don’t want any inhibitions [about] doing the right things for the business. Because all the layers and different constituencies [involved in a joint venture] are stripped out, management can make a very pure decision about what is right for the business.

What is “right for the business” is something that Jim Sinegal talks about in a series of videos I watched from the late 1980s.

Jim was like a prophet in that way. He knew what made the business tick. Even now, if you watch his inspirational sermons, they’re extraordinary. I’ve also never seen a CEO more in command of the details. His capacity to remember the details of this huge business was unbelievable. If you said to Jim, “I love those frozen peas at $3.99,” he’d say, “They’re $3.86.” He knew everything about every item at every single store and was always there at every store opening. The board realized he was a genius.

I asked Jim what made you an influential board member. He said, “Tony knew what was going on in every aspect of every business, had his finger on the pulse of every trend, understood where things were headed and shared all of that with us. He was not timid about telling us if we were going in the wrong direction, but he did it in such a way that you felt you were learning something.”

What can I say? Jim’s a great guy, and we’ve remained friends all these years. I saw him not long ago when we had a celebration of life for Charlie [Munger, who died in November 2023]. He called me recently to wish my wife and me a happy wedding anniversary.

I also discussed your board leadership with Craig Jelinek, who served with you on the board the past 15 years. He said, and I quote, “Tony has an ability as a great leader to keep the board in check, which isn’t easy, since a lot of board members come from different companies.”

We do have great board members who are seasoned executives with diverse backgrounds, but they’re not the kind of people who say, “At my company we did it this way, and you should do it that way.” There’s a reason for that—very few board members, aside from Charlie [Munger], come from a company that has a market value or the perpetuation that Costco has. When we bring on new members, we make sure they understand our culture and are not about to make change for change’s sake. It makes little sense for a successful company like Costco to implement a technology used in a less successful company.

I’d be remiss if I didn’t ask you about Charlie Munger’s board contributions.

I will start off by saying I may not be objective. I had such huge regard and affection for Charlie. He was incredibly smart and insightful, a genius for seeing the right path through clutter and complexity and with the ability to distill this into almost a sound bite. For a giant company like Costco with huge pressures, understanding what’s going on can be complex and confusing, but not for Charlie, who had an unerring compass to see through it all to stay on the right path. That made him an extremely valuable board member.

What is the right path?

To stick to our knitting, our values and our principles. Charlie understood we didn’t have to do anything different than that. His voice was very strong and clear on the matter. He’d remind us, “The right thing for the long term is what we’ve always been doing, so let’s not get confused.” He was an incredibly important board member for 30 years, but we never put him on a pedestal, and we all argued with him, as he did with each of us. We all felt free to disagree with Charlie—and ignore him. But you did that at your peril.

Jelinek said you, too, have the ability to, as he put it, “cut right to the chase— to dissect a lot of information, break it down quickly and get right to the point.” How would you characterize his management leadership?

Craig did a great job as CEO, running it right after Jim retired [in 2012] without missing a beat. We scaled very quickly. [Costco’s footprint enlarged by 45 percent during Jelinek’s term.] He worked his way up the ladder, starting as a Costco warehouse manager. [Current CEO] Ron Vachris started his career as a forklift operator. You don’t see that in many companies, that continuity of culture and institutional knowledge. It’s hugely powerful in terms of the ability to not get distracted, to start tinkering with something that’s working very well.

Was there ever a time when management or the board considered tinkering? Costco certainly encountered challenges—competition from Walmart and Amazon, changing consumer preferences, pricing pressures, supply chain disruptions.

Let me step back to say that Costco has always been focused on doing the right thing for the business and less worried about every Tom, Dick and Harry. Like what’s Amazon doing, what’s Kroger doing? The integral focus of management has always been on our strong principles, to take care of our members, employees and suppliers. The company has always executed on those principles. That’s often true of great companies with the market position and talent. However, the board has always felt it was our role to make sure we understood what our major competitors were doing so [management wasn’t] surprised when they did it.

By considering the competitive landscape for management, it would seem that the board freed management to focus on the growth. Has that always been the case?

Pretty much. When we opened the early units, the board worried about what the small supermarket next to us in Seattle might be doing. Then, when we got bigger, we thought about how we needed to compete against Walmart. By the time Amazon came along, I’ll admit I wasn’t sure how things would play out between an old-fashioned “cash and carry” warehouse store and an online company. But I soon realized there was plenty of room for both of us. As we stand today, our competitive position is stronger against Amazon than it has ever been. They haven’t hurt us at all. When they bought Whole Foods, we paused to contemplate again, but that’s been a nonentity for us. They have nowhere near our scale. We’re different than Amazon.

In what ways?

They offer great convenience and have a massive selection of 200 million items. Non-Costco members think we sell everything, which is not the case at all. We have about 3,400 SKUs compared to Walmart, which has over 120,000. We offer higher-quality goods at lower prices that many of our customers love. Most members are average-income earners nationally, but we also have affluent members with two times the average income. That gives us the ability to do remarkable things. Since the beginning, we’ve always known we could move anything in volume if the quality was good and the price was great—Rolex watches, Dom Perignon, 10-karat diamonds. A Porsche dealer in Seattle put their cars on the floor of a Costco, and they sold out in a week. Affluent people love a good deal.

I read a few days ago that the company is selling between $100 million and $200 million in gold bars each month. Last I looked, a one-ounce bar cost about $2,700.

I don’t know if affluent people are buying them or just people suspicious of the economy. I’d love to see the demographics on the buyers. My point is we’re not interested in selling just anything at a low price. If someone wants to buy a $500 TV for $250 at Costco, we want to sell them a $1,000 TV for $500 instead. We’re always trying to find better items to sell to members, giving them a great deal. We’re by no means a dollar store. At the same time, we’re always trying new things like gas stations, large products like appliances, pharmacies.

Aside from doing the right thing for members, another core value is doing the right thing for employees. In a world where technology is omnipresent and moving faster, a company’s overdependence on homegrown talent can be a negative. Has the board considered this risk?

We are trying to find the right balance and are bringing in some people laterally, people with new skills, perspectives and ideas who understand our values and fit the culture. Our new CFO, Gary Millerchip, is one of them. [Millerchip was previously CFO at Kroger and headed up that company’s personal finance, corporate strategy and integration practice.] We’ve also brought in best-in-class technology people, not easy to do when you’re a “cash and carry” warehouse company. We’re not the glamour job that Google is, but we are bringing in new talent and assimilating them.

You’ve served Costco’s board for 36 years, nearly twice as long as your tenure on Blackstone’s board. Craig Jelinek told me, “Tony is like a founder because of the Series A in the beginning. He also really loves Costco.”

I do love Costco. I love going to the board meetings, where we have all this different talent that I learn from. I learn from Costco management in everything they’re doing and redoing. I find it fascinating. The company is a great window on what’s going in the world of consumers, what they’re buying or not buying. Not to sound small, but I go to a lot of dinner parties. The questions people ask me, they want to hear Costco stories. They’re amazed when I tell them the largest-circulation magazine in the world is The Costco Connection, that we sell more Dom Perignon than anyone else, that Kirkland Signature is the second-largest brand anywhere, and on and on. It brings smiles to their faces. There’s something gratifying to me about all that.