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Leading Companies Online Magazine
Employee Ownership: Operating Through Tough Times
By Anthony I. Mathews, Senior Consultant, Beyster Institute and Corey Rosen, Director, NCEO
 On Labor Day, it’s appropriate to remember that the best labor policy is one that makes sure people actually have good jobs. Unemployment is low in the U.S. right now, but for all but people at the very top, wages have been stagnant in real terms for 30 years and retirement benefits have been shrinking. The employee ownership sector has been ignoring these trends. Workers in employee ownership companies actually get paid five to 12 percent more than comparable employees in comparable companies, according to a major study in Washington state, and have three times the retirement benefits. A 2005 National Center for Employee Ownership (NCEO) study of S ESOP corporations found that ESOP accounts were about five times the national median total defined contribution plan assets for employees in the 54 to 64-year-old age group. Yet almost every one of these ESOP companies also had a 401(k) or other retirement plan, and contributed to it at about the national median — on top of their ESOP. Finally, a comprehensive study of ESOPs by Joseph Blasi and Douglas Kruse of Rutgers found that their employment grows about 2.5 percent per year faster than it would have without an ESOP, and that ESOP companies are significantly less likely to go out of business.
That’s all good news, but don’t tell that to employees at United or Enron or WorldCom, among others. ESOPs are not a magic elixir for management problems, employee relations, or outright fraud. But, overall, they do very well by America’s working people.
So what happens to employees when an ESOP company stumbles? Do these owners lose their jobs just like any other worker? The truth is we don’t really know if ESOP companies are more or less likely than other companies to lay people off when times get tough. It’s a very hard topic to study. We know that just about every ESOP company leader will say that layoffs are the last alternative — but so does every other company leader. We know that some companies, like Hypertherm in Hanover, New Hampshire, have no-layoff policies. Hypertherm makes a point of hiring people who can be trained to do more than one job so that if business slows in one sector, they can pitch in elsewhere. Hypertherm’s CEO Dick Couch says that only the threat of bankruptcy would cause layoffs.
Still, when business is bad, keeping people on no matter what may endanger other people’s jobs and ownership accounts. That’s when having an explicit policy on how to deal with these situations, mapped out in advance, can really help.
King Arthur and the Knights of the Flour Mill
King Arthur Flour is one of America’s oldest companies. Started in 1790, it’s now 100 percent ESOP owned. Its flour can be found all over the country in places like Whole Foods and Trader Joe’s. It’s especially prized by home bakers. Its recipes and cookbooks have won multiple national awards. In 2004, Business Ethics named it the winner of its annual social legacy award. But in 2002, flour prices rose unexpectedly fast, while catalogue sales of its products and baking tools dropped. Company leadership felt there was no choice but to lay off 26 of the 157 workers. VP for human resources director Susan McDowell says it was “just horrible.”
But it could have been a lot worse. For many years, the company had been sharing detailed financial information with employees, so everyone knew just why the layoffs were needed (a good lesson here: share the bad news, not just the good). A plan was already in place, modeled on that of another ESOP company, Reflexite, to deal with downturns. A contingency plan set out phases of response, such as stopping new hires, delaying new development work, voluntary time off, etc. But when all these were not enough, people were laid off. A company-wide meeting was held to talk about why the layoffs were coming and how they would be handled. Meanwhile, employee meetings were looking at ways to save costs and find new business.
It didn’t take long for things to turn around. Sales are up, new people are being hired, new awards being garnered. An employee survey conducted by Ownership Associates (the survey is now owned by the NCEO) showed that employee commitment dropped some during the down times, but went way up after the layoffs to levels never before achieved. The way the company dealt with the problems, it seems, gave employees real confidence.
Chatsworth Products and Surviving the Dark Years
On the other end of the spectrum, Chatsworth Products is a company that began life as an employee ownership adventure in 1991. Prior to that, it had been a division of a fortune 500 company manufacturing racks for the computer and telephone installation industry. In 1990, the parent had decided to divest the operation considering it non-core business.
Based on the vision of a few courageous management employees, though, the story turned around, and rather than becoming the story of a typical plant closure and the abrupt loss of more than 90 jobs, the situation became the birthplace of a grand experiment in employee ownership. Using leverage and the investment of more than half of the original employees, a new company was formed to buy the assets of the division, and Chatsworth Products, Inc. was born as a 100-percent employee-owned ESOP company from its first day.
For a number of years, things could not have gone better. Profits were substantial and consistent. Growth possibilities seemed unlimited and, riding the wave of network installations that took place in the 90s, the company grew from a single plant with over 90 employees to five locations with more than 850 employee-owners spread out around the country (in fact, around the world).
Of course that wave finally broke – hard. In early 2001, as a result of the economic downturn and the dramatic effect of global terrorism, sales dropped in half in a matter of a few months, and the picture turned rapidly from unlimited possibilities to a very uncertain future. This would certainly mean lay-offs, but Chatsworth Products would not handle those in the usual “pink-slip” way we have grown to expect from other companies. The necessary business decisions were handled as the real human, personal experiences they were.
First of all, because of total financial disclosure, it was no surprise to anyone that something would have to be done if the company was to survive at all. As steps were taken they were always announced and discussed openly with employees (both affected and non-affected). Meetings were held at every location to openly discuss the problems and the decisions that were being made. In the end, three of the facilities had to be closed down and employees in those locations were either relocated within the company or laid-off.
You can learn a lot about a company by how they handle a layoff. Rather than just sending the usual mass email to the employees of one of the closing plants, the manager wrote a personal letter to each employee sighting their specific contributions and thanking them for their hard work and commitment. In another location, a 60-day transition period was required both as a legal notice of the closure and as a time to get inventory of materials relocated to other facilities. In overwhelming numbers, the employees of the facility voluntarily stayed on and worked together to see that it was the smoothest transition of the business possible. No customer suffered any loss because of the shut-down. In fact, worker attendance remained high and enthusiastic throughout the process. In the UK (where ownership is not as tangible because of legal issues), one employee said that he so loved the environment that he would willingly work for half the salary to keep the office going.
While some of the employee-owners had tenure and some pretty sizeable ESOP accounts, many of these employees had not been with Chatsworth Products for very long. Their trust and concern developed as the company grew.
At the same time, the company mobilized special HR teams to set up what they called a “war room” at the facilities. Recruiters were brought on site to help get employees relocated; special facilities were arranged (in a local hotel in one case) to provide employees with help crafting a resume and to give them career and employment advice. The HR teams worked with every employee owner who wanted help until they were successfully relocated. In one case, that took 8 months, but no one was going to give up until a new job was found.
Terry Tyndall, then Vice-president of Human Resources during the entire separation period, summed it up the situation with a very un-corporate sentiment, “It just broke my heart.” Maybe that’s the difference. Employee ownership companies are not afraid to follow their heart.
In the meantime, the entire community mobilized to attack the underlying problem – and it worked. Today, building on the common effort of all the employee owners, the business is back on track, growing, making substantial profits and increasing value for its employee owners.
Other transitions will inevitably happen, but you can be sure that when they do, everyone will be engaged and employee owner communities like King Arthur Flour and Chatsworth Products will come up with solutions that preserve the most value with the least damage to the fewest people. That’s just the employee ownership way of doing things.
©2006. The Beyster Institute and its authors and their entities. All rights reserved.
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