excerpts

Dennis Turcotte, President of Spruce Falls, offers four pieces of advice for companies contemplating an employee ownership program Read More...

Suggestion programs must provide a "win-win" outcome for both the company and the employees. Here are some design principles for managers to keep in mind. Read More...

As they considered options for their unit in the wake of its difficulties within Landmark, manager Mark Klingbeil and the others in the Calgary office saw four options. Here is the one powerful argument that won out. Read More...

Companies embracing employee ownership need to think of an exit strategy for internal shareholders. How did our companies handle this issue? Read More...

How do you sell employee ownership to your customers and clients? We have identified five actions that should be utilized. Read More...

Kim Sturgess, President and CEO of Revolve Technologies, has learned three key lessons about employee ownership from her experience at Revolve. Here are her insights. Read More...

Dennis Turcotte [President, Spruce Falls], has four main pieces of advice for other companies that embrace employee ownership.

Stakeholders must establish very clearly at the start what their values are and what their expectations are upfront.
That is tough to do, because subconsciously everyone fears being too overt as they are working together to save their company and don’t want to create any discord. But Turcotte believes people must be honest and transparent. "The values, objectives and principles from each party’s perspective must be nailed down upfront," he says.

The parties must drill down deeper and discuss the value system of the combined entity after the buy-out.
In practice, what will happen when trade-offs are faced? What will flexibility in the work force mean? What does productivity mean? Is the operating premise to employ as many people as you can or not one more person than necessary? Where on the continuum from extreme capitalism to communitarianism will this new company try to end up? "At the end of the day, for any relationship to get stronger and flourish, the fundamental values of each of the participants have to be aligned enough—and aligned in critical values perfectly—to make that relationship thrive," Turcotte says.

The organization must develop a clearly defined leadership system.
Spruce Falls was lucky to inherit the Tembec system. But every employee-owned company must develop its own leadership system.

All parties must realize that at the end of the day a business must maximize its returns and business performance.
Other issues and values are important, of course, and must be part of an overall guiding philosophy. But he insists that if a company—particularly one in a commodity business—doesn’t seek to maximize returns, at some point competitors who have that goal will surpass it.

Design Principles

To be effective, suggestion programs must provide a "win-win" outcome, for both the company and the employees. At the New Algoma, the first flood of suggestions consisted largely of improvements that employees could clearly see were needed. However, nobody had ever asked them for their ideas before. Also, the employees were highly motivated to save "their" company. After this initial enthusiasm wanes, managers would do well to keep the following principles in mind for their company’s suggestion program:

Long-term success depends on trust, so ensure that the plan is administered scrupulously. Every suggestion should be taken seriously and should be given an answer.
Most successful plans are designed with the participation of employees.
The formula for calculating a bonus for contributing a suggestion, if one is offered, should be clearly explained and comprehensible to employees.
It should be decided up front whether the reward/bonus is based on individual or group suggestions, or both.
Top management support is crucial and should be visible.
In an operation that is already efficient, gains from suggestion programs may not be worth the effort. The paradox is that when increased efficiency and employee co-operation are necessary, trust is probably low and so the plan will be difficult to establish. That is why many companies start with health and safety or other "hygiene" issues first to build trust.

Four Options to Resolve Difficulties

As they considered options for their unit in the wake of its difficulties within Landmark, Mark Klingbeil and the others in the Calgary office saw four options:

The operation might be sold to another company.
The operation might simply be shut down, with the staff left unemployed.
They could attempt a management buyout of the Calgary office.
They could attempt a broader, employee buyout of the Calgary office.

If they wanted to preserve their current work environment, those four options quickly dissolved into two: the alternative methods of buying the operation from Landmark. And of the two, a management buyout on the surface seemed preferable. It was smoother and less complicated. Management was a smaller and more homogeneous group than the entire 21-person office. Indeed, the financial advisors brought in to help structure the deal pointed out that 80 percent of money in employee buyouts generally comes from the 20 percent of staff who are managers, so it made sense to confine the effort to managers.

But there was a powerful counterargument that won out. The office was a service operation, dependent on the skills and enthusiasm of its employees. Motivationally, it made sense to bring as many people in as owners as possible. With an employee buy-out, Jonathan Downton noted, "everyone would share in the success of the company or have an opportunity to share in the success of the company. Everybody would be committed and would be trying to make the company succeed. It would be a joint effort rather than the effort of one or two people."

Exit Strategies

Companies embracing employee ownership need to think of an exit strategy for internal shareholders. Otherwise the employees may find their wealth inaccessible until they retire or quit. The company may also find itself hamstrung by such repurchase liabilities.

How did our companies handle this issue? Some went public and created an external market for the shares. Others sought a share swap with or an outright sale to a larger publicly traded company. How did these companies and their employees fare?

At Creo, the decision was to take the company public. The July 1999 initial public offering of shares put the company’s valuation at $1 billion, giving the founders and early employees 160 times the hypothetical value of their first shares.

Others decided on various sale scenarios. Employee owners at Spruce Falls, who initially owned 52 percent of the company’s shares, came to trust Tembec’s leadership over a period of six years. It must have seemed natural to sell their shares to Tembec when it was allowed to increase its stake from 41 percent to full ownership in 1997, with an average employee investment of $10,000 at the end of 1991 turning into about $145,000. Frank Dottori observed that many employees were uncomfortable with share ownership: "They want job security so they don’t have to wake up tomorrow and find themselves unemployed. But they don’t like to be shareholders. Many will say, ‘I can’t sleep at night if I have $10,000 invested in Tembec and see it drop from $10 to $9, with me losing $1,000."

At Integra, the company took what Klingbeil called "the elevator ride of value." At Integra’s worst moment it was virtually nothing. Two and a half years later, it was probably worth 10 to 20 times earnings, a significant value per share. However, economic cycles made the share value extremely volatile. Employee capital should theoretically be patient capital, but many employees find it difficult to be patient. So Integra employees chose to be bought out by the Scott Pickford Group rather than continuing as an independent company, swapping their shares for shares in Scott Pickford’s parent and reaping 10 times their original investment. Most kept their shares in the publicly traded company, rather than cashing them in after the lock-up period expired.

At Revolve, the employee owners, who split their holdings across their two business lines, had a long and complicated journey to safety. In November 1997, SKF bought a 40 percent stake in the company. But SKF wasn’t interested in the gas seal business, so Revolve had to sever that operation off. The seal business was owned 100 percent by family, friends, and business associates. The magnetic bearings business—which quickly grew to become the large operation—was 60 percent owned by those same family, friends, and business associates, with SKF holding the other 40 percent. Employee owners had to wait six months more to sell their remaining interest to SKF and to another partner firm.

SFG also found a strategic buyer—after employees there also experienced the elevator ride of value—and became an operating division of Cayenta. Some long-term senior employees found the value of their shares worth as much as $400,000, while relatively new junior employees got a few thousand dollars.

Some of these exits weren’t as much strategy as luck. And some employee owners are still waiting for their opportunity as at Great Western Brewery.

How To Sell Employee Ownership To Your Customers And Clients

Appeal to local pride.
If your employee-owned company was formed by buying operations from a large, impersonal or distant owner, you may be able to make an emotional appeal to customers based on regional identity. This can be especially powerful if the product itself has emotional appeal, as was the case with Great Western Brewery.

Get your front-line employees to work better with customers.
Customers might be better served by direct contact with the employee owners who are responsible for the product or service. Some self-directed groups at Algoma, for example, worked directly with customers and became "a model of co-operation."

Give empowered employees latitude to make decisions affecting clients.
For example, at Creo, employees can spend money to satisfy customers without getting permission, as long as they know it makes economic sense. As Project Manager Colin Evans puts it: "Let’s say a problem comes up in North Carolina and the client needs me tomorrow. It costs $2,000. I can just make the decision. I don’t have to call anyone."

Sell clients on the basis of employee ownership itself.
You may find customers will assume that employee owners can give them superior service or products because they have a stake in the company’s success. This was the case at Integra Geoservices, where the firm sold itself as employee-owned. They found many clients wanted a service provider that they could trust and felt more comfortable with employee owners.

Use a connection.
If your employee-owned company is a spin-off from a larger one, you may be able to negotiate not only a good separation agreement but also favourable contracts to sell your products or services to the former parent over a long time period. That was the case at Revolve, as former parent NOVA became Revolve’s first customer, continuing all the research and development programs that the group had been carrying out for it. An agreement that NOVA held with Pacific Wietz to market a dry gas seal worldwide was also assigned to Revolve, providing significant cash flow.

Three Key Lessons

Kim Sturgess [President and CEO, Revolve Technologies] has learned three key lessons about employee ownership from her experience at Revolve.

Make sure at the outset that you get top-flight input on structuring the deal—and similarly with any future deals to bring in outside investors. In particular, think about your exit from the very beginning. "People told me to do that and I said, ‘Yeah, yeah.’ But you have to think about the exit from the start," she stresses.
Tied to that is the necessity to maintain control. Revolve’s team lost it twice: once to the venture capitalists and then again, on the magnetic bearings side, when it joined too closely with a major partner, SKF, giving it the right to buy up more of the company. That dramatically reduced any future negotiating power for selling the rest of the company. As a key customers and sales channel, Revolve was too dependent on SKF; when the buyout offer came, the employees effectively had no choice.

From the start, an employee-owned company must assess how fast it wants to grow versus how much control the original team wants to retain. Taking on venture capital can speed growth. But it comes at a cost. "The minute you lose ownership and voting control of the company, you have your money invested in something that you don’t control anymore. That situation should be avoided at all costs. If you want to put everything in, you need to control," Sturgess stresses.
Finally, she warns against ever getting into a situation in which you are trying to manage by consensus in a group. "Never—ever. It sounded great and it fit with my views: I like to be inclusive and empower people. But somebody has to be in charge. Period, end of story," she says.

That means settling the tension between being employees and owners. "Employees are employees and owners are owners. When employees try to be owners and be involved in all the decision-making—well, certainly in our case it didn’t work. Things got better when everybody agreed they were employees first and owners second," she says.