Don Flow: Ethics at Flow Automotive

Donald E. Flow is owner and CEO of Flow Automotive Companies, including 30 dealerships and more than 800 employees. Dealerships go across many brands from MINI and Saturn to Cadillac, HUMMER, and BMW and are located in Winston-Salem, Fayetteville, and Greensboro, North Carolina, and Charlottesville, Virginia.

Don received a Bachelor of Science in Commerce from University of Virginia, a diploma in Christian studies from Regent College, Vancouver, B.C., and an M.B.A. from Wake Forest University, graduating with highest honors. He has worked most of the jobs in an auto dealership including technician, services, sales, back office and various management positions leading to his present position.

Don is very active with auto manufacturers in leadership and marketing councils. His long list of community involvement includes: Chairman of the Board of Visitors, Wake Forest University Graduate School; Board of Trustees, Winston-Salem Piedmont Triad Symphony; Board of Directors, Forsyth Medical Center Foundation; and Elder, First Presbyterian Church. He is an avid tennis player, skier, and reader, has been married twenty-five years, and has three children.

Ethix featured this Conversation with Don Flow in the March/April 2004 issue. When the economic crisis hit in September 2008, the automotive industry was one of the hardest hit. We did an update with Flow in the March/April 2009 issue. Now that the recession is easing, see what Flow told Ethix in September 2009.

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Ethix: People don’t generally put “auto sales” and “ethics” in the same sentence. Tell me how you link the two.

Donald E. Flow: The traditional model in the automobile business is really laissez-faire capitalism, and at the center point is a transaction where both parties try to maximize their own position. Thus the auto dealer sees the customer as an element of the profit-maximization model. What we try to do is to change that model and ask, “How are we serving the customer?” This is a completely different starting point. So our sales processes are totally different from most others in the car business. At most of our stores, there’s no negotiation. The price is given right up front to the customer.

The whole approach to sales, service, and everything else starts with, “If we have a covenant relationship with this customer, if we are to treat them like a valued friend, what would every interaction look like?” I do a training program inside of our company and always raise the question, “Would you send your wife (I know this sounds chauvinistic [laughing]), your mother, or your daughter, unaccompanied, to buy a car?” “Without any coaching or counseling?” Then I ask, “Would you go home to the dinner table tonight and tell every person at your table exactly what you did and said today?” If you can’t embrace that, then we’re doing something wrong.

It all starts with a value proposition: if we create value for customers, they will reward us financially. That starts with being a place of trust. Every interaction with the customer is based upon that, with this concept of covenant, creating enthusiastic customers for life.

Every day I get letter after letter from people saying that our dealerships are remarkably different. We have been awarded every customer satisfaction award you can get in the car business. That doesn’t, by the way, translate that we are much more profitable than everybody else. There are still plenty of people who choose to go through that transaction process. We do very well financially, but there is more than one way to be successful in a capitalistic market. This is the way we have chosen to go.

How does this model work out in your service commitments?

We have a number of unconditional service commitments. The first is, if we do not repair your vehicle correctly the first time, you don’t pay for additional repair. If it’s not right, we come and pick up your car, we repair it no matter what the cost is to us, and return it to you. We believe we’re supposed to be professional and you’re paying us to diagnose it correctly, so we don’t think we have the right to charge you again for something we charged you for the first time. Second, we make a commitment to complete the repair at the time promised. So if we say it’s going to be ready at 2:30, and it’s not, we’ll take a car to your home or office and bring your car back to you when it is finished so you’re not inconvenienced. Thirdly, when we give an estimate, that’s the only price it’ll ever be. If we misdiagnosed and found out that it wasn’t a $100 repair but it was a $500 repair, we eat the difference.

How does your model affect the selling process?

We have a customer-centric selling process. We don’t have the traditional run back and forth negotiating process; we have a pricing structure that’s set. Our prices are actually a little bit lower because we’ve been able to manage our costs better with our internal processes. You don’t have to be a tough negotiator, or more educated, to get a fair price. If you’ve got a Ph.D. or if you’re a janitor, you’ll pay the same price for the vehicle.

How did you decide to price cars this way?

We did a study and found that the people who typically paid the least for the cars were the most able to pay. Those least able to pay, paid the most. For me, it was wrong to take advantage of the least able, a clear violation of the biblical mandate in the book of Proverbs.

We went back and restructured our business. Our profit structure has to be much tighter around the mean, and we have to communicate enough value that a person will pay us a fair return.

When I mentioned this to someone, he said, “That’s fine until they go out of business, because they can’t make money when they are not charging for extra repairs, delivering cars, and the like.” What is your experience?

We have been very profitable. We have enormous loyalty with our customers. We’ve also been able to manage our costs much better than other folks because we don’t have the overhead associated with all of the negotiation processes and we’ve greatly streamlined our operations. We found what profit structure people would be willing to pay us for that approach, and though it was slightly less than the average profit you could make the traditional way, we made up for it with our cost savings. You have to break the whole system apart and reassemble it to make it work.

Did you start this way? How did you get into the automobile business?

My father had a Volkswagen dealership in Winston-Salem, and I joined him after college. My Dad had set a precedent that we would be measured by our honesty. That was really a hallmark of him as a man. In addition, he was very open to thinking about doing things differently. He was a great mentor to have and encouraged me to think creatively, as opposed to just saying “you can’t change anything; this is how it is, period.”

And then you took over a dealership at what point?

I worked for about four or five years, doing every job in the dealership: I was a technician, service advisor, salesperson, and worked in finance. Then I went back and got an M.B.A. When I finished, at age 27, my Dad said, “You’re in charge of this dealership, see you next year.” He really let me find my own voice and encouraged me to develop my thoughts on how to run a business. Then he allowed me to partner with him, and encouraged me by saying, “Go, start building stores, go on your own.” He was a great mentor.

And did you put in these practices right at the beginning, or have they developed over time?

Some I put in right at the beginning, since I had done the jobs and felt the strain with them. In 1983, I read In Search of Excellence, where I learned there was a certain value structure that should be part of an organization. That year I sat down with a group of our employees and said, “Let’s write a mission statement.” We decided we were going to deliver extraordinary personal service at every point of contact with the customer. Based on that, we started in the service department looking at every little thing: how we greet customers, how we communicate with them, step by step all the way up through the business. We were young and we made a lot of mistakes, and worked extra to cover for them. But along the way, we saw tremendous customer response, and we grew that particular dealership enormously. Then we started buying additional dealerships and putting these processes into place.

Now, you can believe this way, but you have an organization with 800 people. How do you get 800 people to carry out the same mission?

I want to be careful saying all 800 believe the way I do. We think about different levels of commitment. At the bottom is Noncompliance. The next level up we call Grudging Compliance. That is, if somebody’s staring at you, you’ll do it; if they’re not staring at you, you’re not going to do it. Neither of these will work. Sometimes we let a person in the Grudging Compliance group stay for a little while. But our culture is strong enough that Noncompliance doesn’t work at all. His or her peers will say, “This is not how we do business here.” They either leave or are fired.

The next category is Genuine Compliance, where motivation is more external. These people say, “I really like the people I work with here. They pay well, they treat you well, if this is what you have to do to be successful here, I’ll do it.” We call those “good soldiers.” We can’t have them in positions of leadership. Over time, they may begin to see and believe, but they don’t move up if they haven’t made it internal. The next level we call Enrollment. These folks believe and live it out themselves. They can’t imagine not working this way.

We’re very careful that our significant positions of leadership are staffed only by folks in the highest category. Even a very high producer will not be in a significant position of leadership without this internalized understanding of how we operate.

We spend a lot of time in one-on-one mentoring and discussions. We have all kinds of seminars and orientation programs from the first day people are hired. We have small group meetings, large group meetings, all the traditional things you would think about. We talk about it ad nauseam. Max De Pree [former CEO of Herman Miller] once told me, “You need to say it so many times that if you hear yourself say it one more time you’re going to throw up. Then say it again.”

This must mean that things you’re not personally involved in demonstrate that the philosophy of customer commitment is working. Can you give me a service example?

The most dramatic story involved a couple who were traveling to Florida from up North and their van broke down at night. They called AAA and we were the only folks open— because part of our value structure is to be open when our customers might need us. The service advisor worked with the technician and found it was the transmission that had to be replaced. The couple explained that they had limited vacation time and were trying to get to Florida, and was there something that could be done to avoid a long delay for the repair. So the service advisor called his wife and said, “Make up some beds in the house tonight because some folks are coming to stay with us for the night.” She cooked them dinner, they spent the night there, and the technician stayed till about 2:30 a.m. to complete the repair. At 7:00 a.m. they were back on the road.

I didn’t know anything about this until I received a letter in which the people said, “It’s possible we went into a time warp and landed in Heaven. Here’s what happened. If everybody’s like this, we’re moving here and so is our whole town!” Obviously, we celebrated what this guy had done. When we interviewed him, he said “Well, isn’t that how you would treat a valued friend?”

So it does make its way down into the organization ….

This illustrates another place where we’re working hard. We want to break down the hierarchical concept of the organizational structure, creating space for leadership all through the company. We want to give space for people to express their gifts, in any way they want to inside of the organization. This creates a more chaotic feel inside the organization, but I think it’s a deeper, richer feel, for everyone.

That suggests that the ethics starts with the customer, which we’ve talked about, but it also involves the employee. And so how do you treat employees? You’ve talked a little bit organizationally, but what’s the general approach to valuing employees?

It begins with language. We like to say, “There are no little people, and there is no ordinary work.” Everybody’s work counts, everybody’s work makes a difference, and everybody deserves to be treated with respect. Even if a person is a very high producer, if they do not take care of customers, they cannot win an award in our company.

You have some employee benefits that you provide as well, in demonstrating value to people.

Yes, but we always want to start with how we treat people, one on one, every time. It’s a little bit like a parent who says, “You know I never tell my kid I love them. I don’t have to, I give them all kinds of nice things.” We want to treat employees as whole persons. We have employee gyms and we have a college scholarship foundation program for all of our employees’ children. They all get college scholarships. We have a housing assistance program for all entry-level employees. If they save money we match their down payment to buy a house. We try to pay our people a good wage. But in the end, it can’t be just about these things—it must extend to treating each employee as a valued, respected person.

And what about the relationship of FlowAuto with its surrounding community?

We build Habitat for Humanity homes together, and we are involved in dozens of United Way agency programs which we either volunteer for or help start as a company. We look at three dimensions to our company: to deliver unparalleled service to our customers; to enhance the lives of the members of our organization; and to positively impact the communities in which we live. All three of those are balanced and systemically related to each other.

A long time ago the Greeks wrote about the Polis. They said good, beauty, truth, plenty, and order were at the center of life. We think about social capital, aesthetic capital, intellectual capital, economic capital and political capital. In the Greek’s order, all those are linked together to create the Polis. We try to invest in our community in each one of those spheres, to create the strength in our community.

We are heavy investors in education, from inner-city programs up to universities. We have started inner-city educational programs and underwrite them. I believe we are the largest per capita giver to United Way in the country for our retail sector. We are a heavy supporter of arts, including all kinds of art and music programs throughout the communities where we do business. I serve as chairman of the Economic Development Foundation for this part of North Carolina. We have lots of employees involved in all these areas.

That’s a very impressive record. Do you ever think about the kind of vehicles that you sell, and ask the question “What do these do to the community?” I couldn’t help notice as I came into the airport at Greensboro that you have a HUMMER dealership, and the question in my mind was, “Is a HUMMER something that is good for the community?”

The reason we decided to be a HUMMER dealer is that AM-General is coming out with an H3 and an H4, which are small, fun cars. We had to buy the H1 from AM-General to get the brand. The H3 and H4 are actually going to be hybrids and have high gas mileage and everything. This is a complex issue and I think about it regularly.

There are some cars I am not interested in representing. Some advertising we don’t use, either. We don’t use advertising that objectifies people, denigrates people, or focuses on enhancing your status as a human being.

Because of the impact on people?

Right. For Americans, cars play a role in our psyche. When I meet with somebody I sometimes say, “Tell me about your lifestyle, and I can tell you what you drive.” I was with a group from Greenwich, Connecticut not too long ago and we were talking about this, and a woman said, “Well you won’t be able to tell me what I drive.” After hearing the woman’s story, I said, “You drive an Audi wagon.” She said, “How could you have possibly known that?” I said, “Because you don’t like to be conformist, you don’t like to show off wealth. You think all the rest of the women drive Volvos. You don’t want to be like the rest of the women, and the Audi is a little bit different.” Auto manufacturers spend hundreds of millions of dollars to develop these products for folks with a very clear market segmentation.

We have talked about your thinking regarding customers, employees, and the community, but the suppliers are another one of your stakeholders. How do you work out your practices in the way you interact with suppliers?

We spend enormous time in that area. We free up our key people to spend time on manufacturers’ boards. Top people spend probably 20 days a year, for no compensation. We want to demonstrate our commitment/loyalty to the brand by providing resources from our company. This is at the center of building and maintaining a trusted relationship, and perhaps will spread some of the ideas we have developed.

I have personal relationships with the CEOs of all the brands we represent. We need to know their long-term strategy. We are appointed by the manufacturer, so we need to do a good job to earn the right for additional dealerships. But I think they’re also interested in us because we’ve been successful for them.

How have auto dealerships been affected by the Internet? With the people having so much more knowledge, does it change your business model?

We want to be transparent to our customers, so it actually fits perfectly with our business model. We share all of our information with our customers. In our appraisal process of a car, we go online together with the customer, pull up all the auction reports, Kelley Blue Book, NADA Black Book, and agree on a figure together. Other dealers probably have seen quite a struggle, because the way they’ve made their living was in knowing things their customers didn’t know.

We have kiosks in our showroom floors so people can go online. We also have an Internet sales department, because some people want to do all of their transactions over the Internet. We have folks who want to start with the Internet and then come in and visit us. So we try to accommodate the customer at every step, in the way they’d like to buy a car. In our operating principle, the customer is in control of the process, and our job is to help the customer in that process.

For about ten years in this store, we posted all of our best prices in the window of the vehicle. The problem is, pricing from the manufacturer has become so complex you can’t keep up with them. If you’re a farmer you get a $500 rebate, a student gets another discount, it was just one thing after another. We were making mistakes changing stickers as programs changed, so we said there had to be another way. We decided to put the prices in the kiosk, so when a program change comes along, we can change the prices and these will be accurate immediately. The biggest deal came from the sales people who asked, “Will the customer feel like we are trying to change our process by not having it on the car anymore?” We had to go through a whole team process to make sure this worked and supported our values.

We have created a computer model so we can know exactly what we have in our turnovers and margins and pricing models. We know exactly how much inventory we need where.

You’re not a public company, so except for yourself, you don’t have to think about the other stakeholder, the shareholder. Is that right?

We do have equity partners for two reasons. One, capitalism works and it is good for people to have a share of the ownership. Secondly it is healthier for me personally. It forces me to treat people in a way that I want to treat people. I don’t want to rule this by fiat, but collaborate and work side by side. We also try to run with the discipline of a public company in the budgeting process. So it’s not Mom-and-Pop like.

I’ve been with enough entrepreneurs in my life to see people who learned to work with partners and those who didn’t have partners. Those who don’t have partners never, or rarely, develop a leadership model that really treats people with respect because they’ve got all the power. I feel holding that much power is not healthy for me.

Are you ever concerned that your equity partners could lose heart and suggest cutting a corner to create more equity?

Yes. I spend a lot of time with these people before they become equity partners. Unlike a public company, I get to choose the partners. This allows me to say, “This is who we are.” We must be consistent with our governing principles. An enormous amount of my time is spent on focusing, rewarding, and recognizing what we are accomplishing.

We have an environment where real learning is taking place. We talk about accountability, not to perfection but to learn. Real learning is always about change and openness to change. We are continuously trying new things, innovating. Sometimes an idea—whether it comes from me or someone else—works, and sometimes it doesn’t. Last year a group of technicians in this one dealership didn’t feel like the service advisor was committed to service any longer, and they wanted to make sure that he was on board with them. The culture is strong enough that if I tried to change it, I would hear about it!

Do you think the model you have described is scalable to a larger business? What about a publicly traded company that has shareholders?

I do. You have to be clear about who you are. Herman Miller is an excellent example of a public company working in this environment under the leadership of Max De Pree, though he did not manage through a serious downcycle, where it gets more difficult. I’m in discussion right now with a number of public CEO’s who are concerned that the extreme pressure of performance in the shareholder value model tempts honest people. There are some problems we avoid by being privately held.

Capitalism works best when transactions have the context of trust. When you don’t have the context of trust then you have to deal with the significant cost (money and time) of the legal environment. This is very inefficient. It doesn’t make sense to spend thousands of dollars for something two people can shake hands over. We think we are instilling that trust environment. We have a service advisor who has been with us at our BMW dealership for fifteen years. A number of customers, when they go out of town, call Jim and ask him to drop them at the airport and fix their car while they are gone. They just trust him. He simply sends the bill to their office. For fifteen years he has built up this trust and he has never taken advantage of it.

Every new franchise we buy goes through a training process to spread the culture. This enables us to grow, and it shows the process can scale. We have a very clear idea what the culture will be in our growth.

John Reed, reflecting on the merger of Citigroup, said most mergers don’t work because of the different cultures. Clearly creating the common culture among the dealerships you buy is essential to the way you operate.

Standard business and M.B.A. training teaches us that the purpose of business is maximizing shareholder value. How do you think about the purpose of your business?

It’s about those three things I talked about before [customers, employees, community]. We have to have a profit to do those three things, but profit is not the goal. I don’t know a healthy person who gets up in the morning and looks in the mirror and says I live for my blood. But I don’t know a person alive who doesn’t have blood. Blood is like profit—necessary to live, but not the reason for living.

If you do not create value for capital, you are actually destroying wealth in society. An organization shouldn’t exist if it is destroying society’s wealth. What is the right return? Some people call for 12 percent. Then they want to make 15 percent next year and 17 percent the next year and 22, 24 … where is the limit?

I’ve got a sustainable model: I have customers who are very loyal to my organization, and we’re growing. We want to have an adequate return on capital, and then we want to reinvest in three areas: to grow our organization for the future, in our employees, and in our community. We try to balance these three areas. If we don’t create value from our capital, we would be putting our employees’ future at risk.

What we are trying to do in this revolution is re-personalize the workplace. When the workplace is impersonal, people don’t matter. Once you re-personalize it, you know people. You are very careful about firing and laying people off because these are real people with families behind them. I go to bed every night with that over my head. You know 800 people, a thousand when we finish our acquisitions, and there are a thousand families whose dreams are caught up in our ability to lead this company. So there is a sense of responsibility associated with that. I can’t imagine what it is like with 150,000.

It’s easy for people in leadership to get isolated. What do you do to keep from getting isolated? How do you keep this personal touch?

I spend a lot of time with our folks, locking it into my calendar early in the year. It will slip away if I don’t do that. Sometimes I’ll tell one of our general managers I’d like to come by and be part of the sales force. I’ll work with customers because I really want to do this myself. I want to ask them to buy a car, but also to find out if they have a good experience here. The great thing about our business is customers are here all the time. I can walk over to a dealership and do a focus group in ten minutes. That’s the easy way to get feedback.

The negative side of that is I am inundated with people who want to give me feedback. And email is one of the worst, because every employee and customer has an idea. That’s great, except trying to respond to each one of them is very difficult. I wish I could write more quickly, but I always feel that I am responsible to say something meaningful as opposed to just saying thank you.

Tell me a little about your own personal drive to run your business ethically, to think through each step of your operation. Where does this come from?

I have a real sense of God calling me to this work. After getting my undergraduate degree, I went to Regent College in Vancouver, B.C. for a year of Christian studies. I thought about an academic career, but doing what I am doing was as natural for me as a pastor being called to preach in the pulpit. Loving that person that walks beside you is just an abstraction. I knew lots of Christians who talked about love all the time and they were horrible to work with. This is like a complete anomaly. I have this passion to make it real in practice.

I’m not talking about preaching to those who work for me, to customers or others. I’m not talking about favoring Christians who work here. I want to respect and value all people, regardless of their beliefs. But I am talking about living out the implications of what I believe. This is reflected in how we treat people, what our practices are and what we think is important. This is where my drive comes from.