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Episode 17 : 4 Secrets of Survival You Should Learn from ESOPs

Posted by Corey Rosen on Dec 11, 2020 5:24:00 PM

Corey Rosen from the National Center for Employee Ownership shares his thoughts on how companies can do things differently and really make a positive impact on their employees.

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Episode with guest: Corey Rosen

Senior Staff Member at the National Center for Employee Ownership 

(This episode was recorded in July of 2020.)

 

Key Episode Take-Aways:

1. Companies that do best in terms of employee attitudes, behaviors and corporate performance, do these three things.  (click to jump to this topic below) 

Number one: They communicated regularly with employees.

Number two: The amount of ownership that they provided them was not just a token amount but was a really meaningful percentage of their pay.

Number three:  And this is the one that was most important--was that they created a system of high-involvement management.

2. What  makes people anxious is the sense that I have no control. (click to jump to this topic below)  It's a tough situation, and I have no control over it. If you have a tough situation but the boss says, "Now, okay, here's what our current situation is. Here's the challenges, here's the opportunities. Let's get together. Let's think about forming teams and groups, and come up with ways that we can respond to this challenge." That's a really different message. 

3. The concept is simple but it is constant work to make this happen. (click to jump to this topic below)  The concept is simple but it is constant work to make this happen. And it goes back to that notion of humility. It's constantly stepping back as boss, and saying, "I might be wrong."

 

Continue scrolling to read the full episode transcription.


Announcer  0:00  

Welcome to the "Change the Game" podcast, where we share stories of open-book management and highlight capitalism at its best. Thank you for tuning in to this episode of the 'Change the Game" podcast with special guest, Corey Rosen. This episode was recorded during the 2020 COVID-19 pandemic crisis. Here's your hosts, Rich Armstrong and Steve Baker.

Steve Baker  0:23  

Welcome to the "Change the Game" podcast, where we unite organizations and people who are changing the Game by doing business differently. The Great Game of Business community believes this outlandish thought that we can actually make the world better by making business better and to make business better, you got to make people better. So we're out there looking for those inspirational people and stories of how people are changing the Game. I'm Steve Baker, the Vice President of the Great Game of Business, and here with me, the handsome fellow you see above me, is the president of the Great Game of Business, Rich Armstrong, also co-author of our new book, "Get in the Game: How to Create Rapid Financial Results and Lasting Cultural Change." We're super excited about what's happening today. Rich, how are you? 

Rich Armstrong  1:08  

Oh, good, good. Good morning. 

Steve Baker  1:09  

Yeah, for sure. We share this belief that business has the potential to make a positive difference in the world. And that is capitalism at its best. Today to help us talk about how we're changing the Game is Corey Rosen. He's going to be talking about the four secrets of survival from employee-owned companies. And I'll introduce Corey to you in just a minute. Now, I always start by bringing you some news or a new quote. I'm actually stealing these quotes from Corey Rosen's new book, "Dealing with the Economic Crisis: A Guide for ESOP Companies." Now, the reason I'm admitting that I'm stealing them is because he stole them from the authors of the quotes themselves. So the first one is, catch this, Lao Tzu, some ancient wisdom here: "New beginnings are often disguised as painful endings." Namaste. 

Next, we're just going to jump right into it. This is from a book from 1965: "I learned that there are troubles of more than one kind. Some come from ahead, others come from behind. But I've bought a big bat, I'm all ready, you see. Now my troubles are going to have trouble with me." And that's from Dr. Seuss's 1965 book, "I Had Trouble in Getting to Solla Sollew." So I'll tell you what, great way to start with a little bit of ancient wisdom and some wisdom from Dr. Seuss. I think it's becoming a lifestyle for me. [Laughter.] 

So let's introduce our very special guest and good friend, Corey Rosen. Corey founded the National Center for Employee Ownership. But he's more than that. I mean, this guy is regarded as the leading expert in the world on employee ownership. And he's probably gonna beat me up because I'm blowing this up, but I am so wowed. You know, I'm a convert. I came into employee ownership completely by accident 15 years ago, and it's utterly changed my life.

So I think a lot of what Rich and the SRC folks have done, but also what Corey has done for the employee-ownership community. He's written dozens of books, the latest being "Beyond Engagement." And then of course, the one that's coming out just now, "Dealing with the Economic Crisis: A Guide for ESOP Companies." He's all over the media. Every time somebody needs an expert on employee ownership, you'll see Corey there. He also serves on a number of boards of ESOP companies, in addition to not only being the senior staff member of the NCEO, but also heading up a lot of the research that's happening. He got his PhD in political science from Cornell in '73. He has taught politics, and then he went actually to Capitol Hill, check this out. This is the guy; he's the guru. For five years, he helped initiate and draft legislation on ESOPs and employee ownership. And in 1981, that's when he formed the NCEO. In '09 he won the Txemi Cantera award in Spain for social economy. And we're just thrilled to have you. Corey Rosen, welcome.

Corey Rosen  4:08  

Thank you. It is really an honor to be here. And I have learned so much over the years from the folks at the Great Game, and Rich and Steve sort of alternate on our board. And I can tell you that every year when we have a conference, virtual or live these days, these two guys are the star speakers that people are crawling out the doors; no matter how big a room we have, it's never big enough. But I've learned immensely from them and their new book, "Get in the Game." Boy, that is a terrific book. And if you don't have it, why not? You should get it.

Steve Baker  4:50  

Man, I am so showing this podcast to my mom.

Corey Rosen  4:53  

You should do that. And of course, [I've been] immensely inspired for most of my adult life now by Jack Stack and the things that SRC has done. It's really the model. And I think what has impressed me the most about the folks at the Great Game and the model that you've created is it's based on this concept of humility. Just because I have this title, just because I have this experience, doesn't mean that I shouldn't be listening to you, because you may have a better idea than I do. 

Steve Baker  5:35  

Yeah, amen.

Corey Rosen  5:36  

And that solves a lot of problems in life, if you take that approach.

Steve Baker  5:43  

No kidding. Thanks for saying all that. I mean, gosh, I couldn't ask for a better endorsement right there. So I've kind of built you up to folks who don't know you as the guy, the guru. And you've been around for a long time, you're the guy. So take us back to the time when you were working in DC, because I just don't know many people that have done that. So take us back to that time. You know, most people, it was the '80s, I'm thinking Don Johnson.

Corey Rosen  6:11  

It was the 70s!

Steve Baker  6:12  

Oh I'm sorry, the 70s. Yeah, that's right, because you started NCEO in '81. So let's go back to the late 70s. People were doing a lot different things than hanging out in DC writing legislation. [Laughter.]

Corey Rosen  6:24  

Probably. So I was a political scientist. And I decided it would be a lot more interesting to play the Game than to watch it. I was able to get a fellowship to go work on Capitol Hill. And actually, the first two years I was there, I worked for the Senate Small Business Committee, and then for a senator from South Dakota. My initial legislative work was on land reform, through the reclamation system in the US, which was supposed to have delivered water inexpensively to small farmers. And it didn't work out that way. California had it delivering tens of millions of dollars per year in water subsidies to farms that were 100,000 acres. So we were working on that and some changes came about. And then my boss didn't run for reelection. And I went back to the Small Business committee. 

I was bored one day, and I was reading a Congressional Record--you have to be really bored to read the Congressional Record--and there was this article by this guy, Bill White. Now if you are an academic, you knew who he was; he was this very famous sociologist. And chances are, if you'd ever taken a sociology course, you'd read one of his books, "Street Corner Society." And he gave this testimony on this thing called employee ownership. I thought, wow, that's really interesting. So the employees could actually own the companies that they worked for. That would be great. That would really push all my buttons. It was economically more fair. But it also seemed like it might be more economically productive. And so I started learning about this, and found that it was true then and it's true now that people who I didn't agree with at all politically on anything else, thought employee ownership was a good idea. And people I did agree on pretty much everything else, they thought employee ownership was a good idea.

So you had people on the most conservative side of the spectrum and the most liberal side of the spectrum doing this. Just the other day, Alexandria Ocasio Cortez introduced a bill that would link all federal aid for the economic crisis to public companies to a requirement to share ownership broadly. Well, she's about as liberal as they come. In the Senate, Ron Johnson was interviewed by a local reporter saying he used to work for an ESOP company, and that was really great. And he thinks that future federal assistance to any company should be conditioned on their sharing ownership with employees. And he's one of the most conservative members of Congress. Recently, Mark Cuban said that, and so did Jim Cramer. So it had all these odd bedfellows. 

So here was an idea that really is a kick back, because it does solve a lot of problems in a way that gets around this conundrum that we've had in economic and social life, which is either you're for more redistribution of wealth, and you'll put up with less productivity, or you're for more productivity, and you hope somehow it'll help the people at the bottom. And this says, "No, no, that's a false choice." And so Congress provided all these tax benefits. So I got interested in that. And I ended up writing some legislation, the most important of which was--which is still the case today--that if you sell your business to an ESOP, you can defer taxation on the gain from the sale. So that was the thing I was most proud of getting passed.

Rich Armstrong  10:50  

What started the NCEO? What was that transition?

Corey Rosen  10:55  

So I was thinking about what the next challenges were on this, and here was this really great idea--I thought it was a great idea anyway. And not only did people not know what it was, but people didn't know if it worked. And if it worked, why did it work? So what were the buttons that you needed to push to make this work? And that kind of came out of my academic background. So I talked to some people about existing organizations, about adding those things to their agendas, and they'd say, "Oh, you know, we just can't take that on." So I thought, well, I will.

And fortunately, I was 29 at the time and I was pretty naïve, to say the least; I knew absolutely nothing about forming an organization. But I went down to my basement--I was already starting work on this, but I had the added incentive that the Democrats lost control of the Senate that year, and that meant I lost my job. So I needed to be a little more focused on this.

Rich Armstrong  12:06  

So become an entrepreneur. [Laughter.]

Corey Rosen  12:10  

I was going to do it anyway; I was just going to take a little more time. But anyway, I got started on that. And, interesting story: I didn't get a salary for the first three years. I did some consulting for Control Data. And my boss was a woman named Lois Rice and her daughter, Susan Rice, is one of the people being mentioned as a vice presidential candidate and is former ambassador to the UN. Anyway, that paid the bills for a few years, and I went down to my basement, said, "This is the National Center for Employee Ownership," and hoped for the best, and learned a lot. And now we've got 14 staff. And we have about 3300 members and we're a self-sustaining organization. We have a lot of great resources. If you go to our website, nceo.org, you'll see more about what we do and it can help you think about whatever approach to employee ownership you want to take, whether it's ESOPs or giving everybody equity or whatever. 

So one of the big issues was--and I think it leads directly into what we're going to be talking about today--is does employee ownership work? And if so, why? So we did a really massive research project. The woman we hired, Catherine Klein, to help lead it became a really esteemed professor now at Wharton. And she ended up winning multiple awards for the research that she and I did on this.

1. Companies that do best in terms of employee attitudes, behaviors and corporate performance, do these three things. 

And basically, we looked at companies and we looked at all kinds of variables of unionization, industry, demographics, size, how long they'd had their ESOP, blah, blah, blah, blah, on and on, every variable you could think of. And then we ran it all through the washing machine called multiple regression. And so you can hold everything constant to find out what it is that actually makes the difference, adjusting for everything else. 

And what we found was really clear. The companies that did the best in terms of employee attitudes, behaviors and corporate performance, were the companies that did three things.

Number one: They communicated regularly with employees.

Number two: The amount of ownership that they provided them was not just a token amount but was a really meaningful percentage of their pay.

Number three:  And this is the one that was most important--was that they created a system of high-involvement management.

So we measured that by a simple matrix that said, "How much control do employees have over what kinds of issues?" and the farther you were to the bottom right-hand part of that matrix, where you have lots of control over more issues, the better the company performed. So employees didn't want to just have ownership; they wanted to be treated like owners and have the opportunity to have meaningful, sustained and structured input into how decisions are made, that's informed by the kind of information they need.

We didn't call it open-book management then; nobody did, I guess--that was informed by that kind of information that could make them more capable of making good decisions. That research has now been confirmed in dozens of studies in the US and even around the world, and has become the conventional wisdom, at least in the ESOP community, albeit not the conventional practice. Pretty much everybody thinks they should do it. But as we'll talk about later, that doesn't mean you are doing it.

Rich Armstrong  16:22  

Yeah, exactly.

Steve Baker  16:24  

Right. Meet a lot of those folks, that's for sure. You know, when you talk about the high involvement management style, and you mentioned open-book management--of course that's what we're known for. And a lot of people say they share the numbers. That's half of it, right? It's far more than sharing. And  in your new book, "Dealing with the Economic Crisis," available at nceo.org, you talk about an analogy of a doctor. Would you share that with everybody? 

Corey Rosen  16:55  

Yeah, sure. So imagine you go to your doctor, and you're concerned about something that's bothering you, and maybe kind of worrisome. And you go to your doctor, and your doctor says, "Oh, no, it's okay, I'll take care of it," or "We'll do this or that, but not a big deal." But if you said, "Doc, can explain to me what's going on here and what I need to do?" And he said, "Well, you know, we'll just take care of it." Well, you wouldn't be very happy with that doc. On the other hand, you probably wouldn't be very happy if your doctor just said, "Oh, it's all doom and gloom." What you really want to hear from your doctor is an explanation of what the problem is and then a plan for how you move forward. That's a good doctor. And, unfortunately, that's obvious, right? To even say that, you think, well why are you even bringing that up? 

Well, think of what's happening now in companies where you go to your "doctor"--to management of the company-- and the doctor says, "Oh, don't worry about it; it's going to be okay." But you know it's not okay. You know that something's going on here. You can see what's happening, and you're worried about it. So that's not any good. So okay, now the company says, "Okay, here's what's going on. We got this challenge and that challenge, maybe you're doing okay now or before but next quarter looks iffy, or you're not doing so well now." And what the doctor--in this case, the CFO or the CEO--says is, "Yeah, but we're on it. We're gonna do the best we can." Now you don't have any control in that situation. You're the patient who has to just trust the doctor to do something for them and hope it turns out. You don't really understand what's going on. You don't know what changes in your lifestyle you could make that maybe would help deal with this issue. Well, if you're an employee in those companies, you're in that same situation. 

2. What really makes people anxious, whether it's this issue or anything else in life, is the sense that I have no control.

What really makes people anxious, whether it's this issue or anything else in life, is the sense that I have no control. It's a tough situation, and I have no control over it. If you have a tough situation but the boss says, "Now, okay, here's what our current situation is. Here's the challenges, here's the opportunities. Let's get together. Let's think about forming teams and groups, and come up with ways that we can respond to this challenge." That's a really different message. 

Yesterday, for instance, I was In a board meeting of a company in Texas called EEA, it's an engineering company. They're really an exemplar of doing everything right. Now, they've had a good first six months--really good, actually a record first six months. But they're an engineering company. So their performance in six months is a function of projects they bid on in the six months in the last half of 2019. A very different situation. So going forward, there's more uncertainty. Well, they haven't hid that from employees. They have all these really nifty charts, they've actually done a really good job of these graphs showing where they are in terms of forecast expectations, backlog, projects bid, projects won, what the next three months might look like, what the next six months might look like, stress tested. Say, here's if we do this well we'll end up here, if we don't do this, we'll end up here. So that's good. Now employees understand what the situation really is-- no sugarcoating.

But the next step is what's really important. They have had all-hands meetings--they do this virtually; everybody's working from home, 100 and some employees. And they've had people break up into groups and submit ideas on, Well, here's a project that we could pursue. And here's another project, here's a different area--maybe we haven't thought about moving into this, so... One project team said, "This is a company that does energy-efficiency engineering. So maybe we should start thinking about some of the new building standards that are going to be put into effect to make the air flow in buildings healthier in response to COVID. That's going to be a big deal in companies, potentially. So let's start thinking about how we can create a project around those kinds of things." They have a bunch of projects that came out of those employee teams, to say, "What are our--and I love this concept--what are our adjacent possible?

So what I mean by that term is--and it's not mine, it comes from the science writer Steven Johnson. He wrote a book called, "Where Good Ideas Come From," which is a fabulous book; I highly recommend it. And he said, In chemistry, if you're looking at carbon molecules way back in the formation of the Earth--stick with me on this--in order for them to evolve, and to become more complex, and eventually to become humans--because we're all made out of that stuff--they had to find some other carbon molecules to, you know, get it on with. And so you create a new thing that comes from the merger of these two. Now, if you try to merge with some other molecule, whose structure is so different from yours that there's not enough touchpoints to actually create something, nothing's going to happen. If you only go for molecules who look just like you, you're gonna have kids who look just like you. What you really want to do is find that one that's the adjacent possible--it's kind of like you, but not entirely. And that's how new life emerges. Well, that's also how new ideas emerge, where we say, "What are we doing now? And what are the variations on what we're doing now that are sufficiently different to create new opportunities, but not so different that they represent a huge stretch in terms of the resources we'd have to attempt to use to get there, and the risks inherent in trying to get there." 

And so that's kind of the process that they and a lot of other companies are using. And it's really important in today's environment, because as awful as this crisis is and is going to stay for a long time, any crisis creates opportunities. And so where do you look for those? How do you find those? And if your business model is, "Management will figure those out and employees will do it," you just lost a huge job opportunity. And part of the reason you've lost that opportunity is that management is ignoring the things that have worked. Hewlett Packard used to say, "Let's not over-learn from success." And I think that's a really good motto. We get used to being successful in something and it's easy to stick with it. Employees are more diverse--and it's a good argument, by the way, for why you should have diverse workforces. And so they're going to look at things a little differently. And you'll have more diversity of opinion. And out of that will come 50 ideas and 48 won't work. But the two that will could change your company.

Rich Armstrong  25:51  

And you know, Corey, speaking of the crisis, of starting that kind of conversation--the  doctor-patient conversation you talked about earlier is happening in a lot of companies. How do you have that conversation? And you talk a little bit about that in your blog and in your new book, about how employee-ownership companies are addressing the crisis. But you specifically mentioned some research that shows that companies that have broad-based employee ownership tend to survive a recession, or crises like this, better. Can you talk about that research? 

Corey Rosen  26:29  

Sure. So you know, one of the things I would often hear, particularly in a group like this, is, "Well, we're doing a lot of the stuff you're talking about, and we do treat people like owners. In fact, we really want people to take ownership of their job." You hear this constantly, that people should have a psychological sense of ownership. And that's good enough. And the analogy I've used there is I'd like to take these people to lunch, a really nice lunch, it'll be expensive. We'll go back in some time warp and we'll do it when we could actually go to a restaurant, and we'll have this really nice lunch. And there'll be wonderful aromas and wonderful food and a great atmosphere. And you'll have all those things. You'll have a sense of lunch, but you can't eat it because it's mine. And that's what you're doing when you're telling people, "You get to have a psychological sense of ownership." 

So what the research shows is that the companies that do all those high-involvement things we've talked about and the Great Game so effectively talks about, there may be some improvement there. But when you combine the two, the improvement is dramatically better. In fact, many years ago, we did a study of open- book management and employee ownership. And what we found was really interesting. Companies that combined them performed better. Companies that just had open-book management performed better. But there were very few companies that kept the open- book system for more than three years, and either didn't discontinue it, or become employee-owned. So ownership is kind of the glue that holds that system together. 

So what happens in a recession? Well, employee-ownership companies tend to have this belief that we really do put employees first--not just in some psychological sense, but literally, they are the owners. And so are we gonna lay these people off? Well, we might have to; the reality is we might have to. But boy, that is our very last resort. So what do you do? Well, your first reaction in conventional companies is to lay people off. In employee-ownership companies, you want to start thinking about, what about work-sharing? A lot of states have work-sharing laws, where if employees are not working full time, a state allows you to pay unemployment benefits to the people who aren't working full-time, but everybody's working. So that's a great opportunity. Maybe we can do salary deferrals. Maybe we can go to people and say, "Gee, would some people like to take voluntary unpaid time off?" Some people will for whatever--family reasons, for instance, maybe early retirement. And let's go and ask everybody, before we do any of these things, what costs can we cut? What things can we get to get rid of that we're not doing now so we don't have to lay people off? 

What I really like about what they've done here is they've laid out--this is in the book--but they've laid this out in detail, step by step. Here's what we do to make layoffs the very last resort. Why does that then mean that the companies who do this survive better? Well, the answer is really simple. When companies lay people off during recessions, and then things get better, they've got to go hire people, or they've got to train people, and they've got to bring them into your culture. And that's expensive, and it's risky. And you may be trying to hire people at precisely the time when your competitors are trying to hire people, too. But if you do everything you conceivably can not to lay people off, then when things pick up, you are in much better shape than your competition. 

So one of the things we saw coming out of the last deep recession.... First of all, we found that ESOP companies defaulted on their loans at a rate of two per thousand per year for acquisition loans. So these are the loans they took out to buy out the owner--two per thousand per year. There are a lot of things going on with that. You had seller notes, and they were deferring payments or forgiving payments. They were bending over backwards to make it happen. But they didn't default. And if you look at private-equity leveraged buyouts, they were defaulting about 19 percent. So these really smart folks--much smarter than the employees, of course, who bought these companies--they were defaulting at a rate 150 times more than ESOP companies. The other thing that happened is that ESOP companies went on an acquisition binge. So the recession ends; they've managed to get through it in better shape. Their competitors, not so much.

And so now they go out and buy these companies. And it turns out these acquisitions work really well. Because you go to the acquired company, and you say, "Meet the new owners: you." And that's pretty cool. And there are going to be these opportunities coming out of this recession as well. In fact, the company's board I'm on, they're going to be doing a couple small acquisitions, because they do them almost for free.

Rich Armstrong  33:06  

Yeah. In the blog that you wrote and we published on our site, you talked about some specific survival secrets that you've seen or observed in your employee-ownership community. Can you talk a little bit about that? One I'm really interested in is what you mean by "get beyond engagement."

Corey Rosen  33:25  

Engagement is the big buzzword in employee organizational psychology. And engagement, the way I think about it, is when I used to watch the Warriors' games, when they had basketball on television--in 1942, or whenever that was--when I used to watch basketball on television, I was really engaged. I was a fan, I wanted them to win; it was great. But I wasn't doing anything to help them win. 

Steve Baker  34:03  

You were a fan.

Corey Rosen  34:04  

I was a fan. And for a lot of companies, that's how they conceptualize engagement. Engagement is, “I care about how this company does and I'm going to work harder. I'm going to wear the team colors; I'm going to cheer hard. I'm going to work a little extra time.” And it turns out--and you can walk through this mathematically if you want--that it doesn't really make that much difference in corporate performance to have employees engaged enough to work harder. Some, but not much. The real change comes from new and better ideas. And you say that and people say, "Well, obviously, Corey, I mean, everybody knows that." So I say, "Do you do that?" "Yeah, absolutely we do that; we are an open-door company." 

Now I ask you: how many of the companies on this call are closed-door companies? How many closed-door companies have you ever encountered in your life--at least ones who said, "Yeah, I actually am a closed-door company?" Pretty much nobody does that. They may be, but they sure don't think they are. This is done with all the best intentions most of the time. And the expectation is that people will walk in your door and share ideas. And that doesn't happen. It's too ambiguous: when do I do it? How do I do it? How do I make my idea sound good? I'm too nervous about it, on and on. 

So the lesson that comes out of that, and the lesson from this vast amount of research that we've done and others have done, is that the companies who get beyond engagement to actual employee involvement are the companies who structure it, who move from permission to structure. So structure is exemplified by all the stuff the Great Game people do, all the things that are happening at SRC, and a lot of employee-ownership companies. So what I was talking about with EEA, where they say, "We're not just going to say, 'Anybody got a good engineering idea? If you do, come walk into Todd, the CEO's, office and tell me about it.' Since Todd's not in his office, send Todd an email, and maybe we can set up a Zoom chat--that ain't gonna happen. But if you say, "On Monday, we're going to break up into a group of teams; everybody is going to be on a team.

And everybody's going to have the assignment to just totally brainstorm new ideas. And then we're going to talk about that, and each team is going to come up with its ideas. And at the end of that session, we're all going to get together and talk about these ideas and help pick out the best ones. And then management's going to decide which ones to pursue. And then we're going to assign teams to pursue those." So a company like Radian Research in Indiana, became a big proponent of this idea of structured teams. So he set up a bunch of self-managed teams in this company. And this is a company that provides metrology, I never know what that was. But that's--I'm on their board, I had to find out--

Steve Baker  37:35  

You should. [Laughter.]

Corey Rosen  37:36  

Yeah. So this is a company that manufactures measurement instruments to see if utility meters are actually measuring what they're measuring accurately when they charge it.

Steve Baker  37:50  

Super sexy, by the way.

Corey Rosen  37:52  

Yeah. So they do this. And it's a pretty good business, stable business, but kind of flat. And Tim got religion about teams. And now they have all these self-managing teams, where instead of a salesperson going and saying, "Here's what we got," a salesperson and an engineer go, and they say, "What do you need? What are your problems here?"  And then they go back to their self-managing team, which is finance, production, R&D, the employees on the floor, who will be involved in it. And so there's representatives from every touchpoint in that process. And they say, "Well, the customer said, 'We need X; can we do X?" And then those teams will do an analysis of whether those projects are worth doing. That's a much better way to develop business than what is the conventional way of approaching that.

Steve Baker  38:55  

Sorry, two things that I just am taken aback by here. One is that you're actually asking the customer to become engaged in the process as well. And you're coming from their pain point rather than foisting products and services onto people because you came up with them. I love that. So they can have a little bit of ownership in it as well. That's fascinating. And then the self-directed groups, having a cross-categorical group working on it, just seems like it's the right way to do things.

Rich Armstrong  39:27  

Yeah, I was just gonna add, Corey, is that what I hear you saying--and I just want to make it clear because I think it's such an important point--is that a lot of times when people talk about engagement or involving employees in the business, they treat it as an event or a training or something like that. And they say, "Okay, we've done it. Now everybody's probably more engaged." But they don't set up the systems and the processes. And I think an example of that obviously, is in the Great Game of Business that we talked about the huddle system. That is part of what we would call structures or systems that allow your employees to plug in at certain times to provide ideas. And if you don't have that, it just seems to go away.

Corey Rosen  40:11  

What the Great Game and SRC have done is brilliant. And it also seems really strikingly, obviously simple. It's often not. But the reality is, the obvious and simple is the thing that often is the most overlooked--and especially as companies get bigger, and they get more elaborate with systems and structures and bureaucracies. The really simple concept that lies behind this kind of high-involvement strategy is if you want this to work, the idea is to get everyday employees together in a structured regular basis, to talk about the business with specific information about tricks and goals and that sort of thing, to come up with ideas on how to improve it. That's not complicated.

It's another one of those things, you say it--of course, you want to do that. But few companies do it, for a lot of a lot of reasons. One is it seems like it takes a lot of time; it does take a lot of time. And people could be working, and so they're wasting their time on all these stupid meetings we do over and over and over again. So you can see that time; it's measurable. What's harder to measure then, is what comes out of those meetings? And what impact does that have on the company? You have to be willing to take that leap, and have a lot of ideas that don't go anywhere. 

And I remember telling employees when we would hire them, “I would rather you have 10 ideas, two of which work and eight of which fail, than one idea that works.” Because the eight ideas that fail, we can dismiss fairly quickly. But the ideas that work could be transformative. So in school, two out of 10 is failing, but in business two out of 10 is pretty good. And it's hard to get over that notion in business. It's a real resistance point. 

Once you have these processes, you need to take the next step, which Great Game does, and a lot of companies we profile in "Beyond Engagement" do, and there's very specific examples of how they do this. But it basically creates a matrix that says, "Here's the idea. What's the potential impact of that matrix--high, low, medium--of that idea? What resources need to be brought to that idea? Is there competition in the marketplace? And what's the potential payoff of that idea?" So you want to look for the ones that end up in the highest return for the least effort, obviously. But you need that specific vetting process. 

Another model, that's called the Swiss-cheese model, where it's, "Do our competitors do it? What are the resources we need and can we get them or do we have them? What's the impact? What's the return on this investment?" And you're looking for the things where the Swiss cheese pieces line up, so you can drop a pencil through them. These are simple concepts but they're really powerful. And companies need to do it.

Steve Baker  43:54  

Yeah, what's nice about what you're talking about here is different structures, different systems, but they all do one thing that a lot of business people overlook, and that is involve a lot of folks in it. Because, like you said, two out of 10 in school are failing. Two out of 10 business is good; in private equity, two out of 10 would be phenomenal, right? If we can involve more people in the idea factory process, instead of being shut down-- saying, "No, we did that 30 years ago, no, that'll never work, what a stupid idea"--you're going through the process.

And that's what we call, people support what they help create. If I'm involved but my idea isn't selected, I still feel better about it, because I was heard. And I was taught something about why another idea is better. That's really teaching me about business and about the marketplace we're operating in. I think that's fascinating because I've seen both sides of it. And if you want to see somebody turn off and fold their arms and get to the back wall, tell them their idea has already been done or it's stupid.

Corey Rosen  44:55  

And the reality is, you might get two out of 10 or even one out of 10 or one out of 20 to start, but you'll learn from the errors and you'll get a higher percentage as you go forward. So there's a great comment here: "I've learned that simple complex is easy, simple is really hard." That's perfect. You know, think about if you wanted to train for a marathon--I like to run, but not that far. But if I wanted to run a marathon, it's not difficult to know what it is I need. It's really simple. Get up and run 10 miles every day for a few months, and then get it up to 15 or 20 a few times. Really simple. It's also hard. It's too hard for me.

Steve Baker  45:42  

Yeah. But it's a choice, right? You choose not to.

3. The concept is simple but it is constant work to make it happen.

Corey Rosen  45:45  

Yeah it's a choice. And that's what this is like. The concept is simple but it is constant work to make this happen. And it goes back to that notion of humility. It's constantly stepping back as boss, and saying, "I might be wrong." My big epiphany running the Center was about eight or nine years into it. We were not keeping staff very long, partly because we barely paid them. But they weren't really totally engaged. And that was obviously pretty disappointing, since that's what we were talking about. And what I realized was that when we had meetings to talk about things, I wasn't trying to develop consensus; I was managing consent. I was saying, "Here's how I see the problem." But once I'd done that people knew where I was going, and they just figured, "I might as well go along with it."

I learned that from a project where I just finally said, "All right. Do whatever you want." And they were right and I was wrong. And it was a big deal, it turned out. It was a big issue. And I thought, Okay, let's try that again. So instead of saying, "Here's what I think," or "Here's how I see the problem," I just say, "We need to talk about this. So let's open it up. Let's see what people think." And unless I felt that I was absolutely 100 percent sure that this was dangerous for us to do, then let's do it anyway. Because I might be wrong. And once we made that change, we're at a point now where voluntary turnover is like a once-every-several-year event.

Steve Baker  47:49  

It goes back to what you were talking about, at the beginning of the show, which is humility. You had to actually be a leader that was humble enough to say, "Maybe they're right; maybe we should try something different." That's good.

Corey Rosen  48:01  

I had to be humble to learn it.

Steve Baker  48:01  

[Laughter.] It can be humbling. I'm going to shift gears just a little bit here to get some of the questions that we're getting in. The first one is anonymous, but it is a kind of a compliment. "Thanks for all the work that you do. We hear so much in the news about how capitalism has failed. Yet evidence would indicate that capitalism has had a massively positive impact on standards of living, but the gains are not as equitably distributed as they should be. In my mind, the system isn't broken. We just need more capitalists--in other words, employee owners." Nice, nice talk there. From Mike, we've got a couple of questions rolled up into one here, I'll try to break it up. "What percentage of shared governance, private or public sector, correlates to shared decision making? 

Corey Rosen  48:48  

Shared governance if you think of an employee-owned company and having, say, employees on the board of directors and so on--that's not very common. And where employees do vote for the board in ESOP companies--and I've had this experience--they just vote for whoever the board nominates, almost invariably. Employees don't generally have a lot of interest in running the company at that strategic level. They have a lot of interest where their expertise aligns with their authority. So you look at a company like W.L. Gore, which is an employee-owned company, a huge company. And their mantra is that authority equals expertise. So if I have an idea, I don't go to a manager because there are no managers. There is no hierarchy, there is no job structure there. There are no titles. If I have an idea, I can do it if I can convince enough teammates to join a team to pursue that idea. And if I can, then I can draw down a budget. So I have to be convincing, I have to show that my idea will work enough to meet that threshold. And that's what employees ultimately are interested in, is that kind of authority--not so much running the company.

Steve Baker  50:17  

And being employee-owned does not mean everybody gets a vote anyway. Right? It's not that exact structure.

Corey Rosen  50:22  

Right. The rules for ESOPs and other employee-ownership plans provide a requirement anyway, for very limited, extremely limited, governance rights. You can go beyond them., but you're not required to.

Steve Baker  50:38  

The second part--and I'm kind of parsing out what Mike has asked here--but he says, "Can you discuss shared governance at Cornell and other higher education institutions?" And then he states, "GGOB, not in this sector?"

Corey Rosen  50:51  

Yeah. Cornell, I was a graduate student there, so that was not something I knew about. When I taught at Ripon College in Ripon, Wisconsin, we had faculty meetings and it was interesting, because faculty, of course, tend to trend left, even then, and talk a lot about the virtues of democracy. But they hated going to faculty meetings and being on committees. They wanted to go do their research; they didn't want to be in all these meetings. But at the faculty meetings, at least at that time--and I assume this is still the case--they do have, in fact, a lot of authority about making decisions about a lot of things that go on in universities. How that works, that's not something I've paid any attention to. I'm sure there are studies of it.

Steve Baker  51:53  

Well, we certainly have been trying for many years to get the open-book concept into the curriculum of higher education. But it's not always received with the warmest of welcomes.

Corey Rosen  52:08  

I can imagine. 

Steve Baker  52:09  

You know, it is what it is. And oftentimes in academia, we see people, if it isn't their idea, they're going to go pursue their idea before they take on another. But we'll keep trying. Another question that we have here is, "It seems like the administration costs involved in ESOP prohibit smaller companies from being able to participate. What are the best options for a 10-to-20 person company? And what size of company do you usually see engage in employee ownership?"

Corey Rosen  52:37  

So you're right that typically the smallest you can be and have an ESOP is around 15 employees, but there are some that are smaller. But in terms of the cost-benefit ratio, it's around there. The annual costs for an ESOP if you're 20 employees, is only about $30,000 a year, typically. So it's not a huge cost. But the cost of setting one up is $100,000 or more. So you can do it, but you typically don't see that. 

If you're not at that level, there are a lot of other alternatives. And the basic trade-off between ESOPs versus other plans is that these other plans are simpler, usually cheaper, and they don't have the same tax benefits. So you can do something like, depending on whether you're an LLC, or a C, or an S corp, you can do synthetic equity--so stock appreciation rights, phantom stock, unit rights and LLCs. You can do stock options, restricted stock that gets people real shares. But in my experience with most really smaller companies, people don't have any real use for actual shares. And so it's just kind of a nuisance.

What they want is the value of the shares. So the most sensible approach is what's called synthetic equity, something that gives you the value of a share or the increase in the value of the share, depending on which approach you want to take, and it vests  over a certain number of years. And it pays out the same way a bonus would. We do have publications--there's a book called, "Equity Compensation and Limited Liability Companies" and "The Decision-Maker's Guide to Equity Compensation." And it's really designed to walk you through these kinds of choices. So there are ways to do it, even if you have three employees.

Steve Baker  54:41  

Great answer, and I'm glad you brought it up because I was going to say that you've written extensively on this and there are lots of resources at nceo.org to help you make that decision. And Rich, I don't mean to monopolize, but I'm so excited to have Corey on. Robert Isherwood has a question if you want to take that one, on the chat.

Rich Armstrong  55:04  

Yeah, yeah. And speaking of resources, Corey, Robert is wanting to know if you could point towards some more research or case studies or examples on how ownership companies have kind of handled the crisis and the challenges. Which is the one in Steve's hands right now.

Corey Rosen  55:21  

It is indeed in the book. If you're interested, the book has lots of examples about how they're dealing with this, including--and we didn't get a chance to talk about this--a lot of really good tips on how to work remotely, including a very useful survey one of our members developed. But if you want to get into the actual data, the academic data, if you go to our website,where it says "Data," you'll see some studies on employee ownership and the impact of employee ownership on performance.

And there's another huge research project we did that's at ownershipeconomy.org. And it's a tremendous research endeavor by our research director, Nancy, who looked at the impact of employee ownership, particularly on Millennials. And particularly at this moment, one of the most important things there was that it turns out that minority employees at ESOP companies do tremendously better on multiple dimensions than minority employees who aren't in ESOP companies. And a lot of that has to do with the rules of how ESOP works, but also the culture in these companies. I think we're grasping for ways to deal with these issues right now. And, boy, this is a good one; this one works.

Rich Armstrong  57:01  

I know we're coming up toward the end. There is one question I want to ask, Corey, because I think it'd be interesting to all of our community. You know, we always ask Corey, about how our guests are changing the Game. How are they doing business differently? How are they providing more opportunities for people to be inclusive into the company, both on the wealth side and also the involvement side that we've been talking about? But what's interesting, is that employee ownership has been around now what since the 70s, right? Why hasn't it taken off? And why isn't it bigger than it is?

Corey Rosen  57:37  

A few key reasons. One is that the linkers to employee ownership--the accountants, the financial advisors--tend either not to know about it or know enough about it to know that it's not in their interest to recommend it. Because they can get bigger fees recommending something else. But it's mostly because they just don't even understand how it works. There's a lot of misperceptions in the business community about what this is, a perception that it must be more impractical than it is. So that's the biggest barrier. We certainly have enough tax benefits. But I think the biggest barrier for closely-held companies is knowledge.

The biggest barrier for public companies and spin-offs of public companies and so on, is the prevailing view frankly, amongst compensation consultants, that equity should go to those people who matter. And the people who matter are the people who pay the compensation consultants to tell them that they matter most, namely the executives. There's a great article by Robert Reich. My dad used to work for Sears, way back in the 30s, when he was first getting started in life. And Sears had an employee-ownership plan. If the employees had the same percentage, 25 percent, of Amazon as they had of Sears, they would be worth $350,000 each. Instead, Jeff Bezos is worth whatever, a hundred-billion dollars. So you can divide the pie in one slice, or you can divide it in a lot of really nice slices.

And it may be economically rational for companies to do this, to divide it more equally. But it's not economically rational for the people who are leading it, who'd rather have one slice of a smaller pie than a smaller slice of a bigger pie.

Steve Baker  59:46  

It goes right back to closing the gap between the haves and have-nots. It's a choice, fairly simple. You've helped to make it simple; it's just not easy. So look, Corey, if you'd indulge us in an extra couple of minutes, there are still a number of folks on the call and there are a couple of questions--I know they're very important. 

Corey Rosen  1:00:03  

Sure. Happy to.

Steve Baker  1:00:03  

Has employee ownership done much to benefit minority communities? What's it done around diversity? I mean, that's what's dividing the country right now, right?

Corey Rosen  1:00:12  

Right. So what we found, and I don't remember the exact numbers, but what we found in this study was that minority employees who work for ESOP companies had about 92 percent higher total assets. Now that was pretty small, because we're looking at Millennials. But what you have when you're in your 20s and 30s has a really definitive impact on what you'll have when you're 60. What you have in assets now will take you 30 years to develop, if you don't start until you're in your 30s, right, because of the compounding effect. They also are paid higher, they have greater access to things like maternity care and paid leave and all those important things, especially for people who are more at risk. So on every dimension... and there is greater job security, much greater job security. 

Then there was also a study at Rutgers where they looked at a bunch of case studies of companies. And the interesting thing that came out of the Rutgers study was minority employees--and they were specifically looking at that--minority employees consistently said, and this really speaks to the Great Game idea, "We learned about finances in our company because the company was an open-book company. When I learned about finances in the company, I felt much more capable of and interested in managing my own finances." And one of the things we recommend, we've got a series going right now on some webinars, is that companies should be providing financial wellness advice to employees in a structured way. So that's what we're seeing happen in ESOP communities.

If you ask, "Well, why is that so different?" It's really pretty simple. If you're in a 401k plan, what you get depends on what you put in. And if you're a low-income employee, and if you're from a minority community without a history and a cushion that makes you feel more comfortable putting this money up, then you don't get anything back from the company. That's not the case in an ESOP.  If you're there, you get a percentage of your pay, period. And so it's much more fair than a 401k. And that's, I think, the main reason why there's that big differential between ESOPs and non-ESOP companies. But we've got a problem; you go to our conference, and it's a bunch of old white guys still. So diversity is a challenge for this community, too. And one that I think we need to deal with. 

Steve Baker  1:03:11  

And that have-not situation that Jack Stack, and all of us at Great Game and I know you guys are too, that gap continues to widen. The only place the have-nots are going to learn how the haves got it is going to be in business. We are the new teachers. And so we take that very seriously, and part of our new Great Game community is we're working on ways to take it home. And to apply the thinking that you have at work and you know, what are the ideas? What are the, as you said, the adjacent possibilities that we could take home. It's really fascinating. And I think it's encouraging because--you watch the news, you consume the media, it's very negative. And we have to keep bringing the positive messages that we can create, we can be accretive to the value of society. So yeah, this is an awesome conversation. Thanks for the extra time. Rich, did you have any more questions for Corey?

Rich Armstrong  1:04:10  

I guess one additional question is, I'm just curious: over the time since you've started this mission and your real focus on employee ownership, do you have any idea about how much wealth has been created in the company since your quest started?

Corey Rosen  1:04:28  

Well I don't know if it would be cumulatively. But one way to think about it is in an ESOP company, if you work there for 20 years--in general, there's a lot of variation-- you're going to end up with assets just in the ESOP worth four times or more your highest pay at the end of 20 years. All of which came from the company. So that's a lot of wealth for a lot of people. I  just read an article the other day. A chain of convenience stores in the Northeast--convenience stores, not some great high-paying, high-tech company. Of 5000 employees--the employees own a third of it--there are 90 millionaires. That's up a third from the year before. So it's starting to really spiral.

Steve Baker  1:05:21  

That's a lot of Slim Jim's. Corey.

Corey Rosen  1:05:23  

Yeah.

Steve Baker  1:05:25  

I love it, man. What a great way to start the weekend. I have one more question for you to wrap up. But before we go remember that Corey and the NCEO team have got myriad resources at nceo.org, including his new book, "The Guide to Dealing with Economic Crisis." Even if you're not an ESOP, there's some great stuff in there, including the illustration that you showed us on your screen, the contingency model. So very good stuff. So here's the question: What is the one thing that every person listening should know or do, Corey?

Corey Rosen  1:06:06  

Well, I'll give you a big life lesson, because I'm 71. You get to say these things when you're 71. One of the things I learned in the school of Jack Stack and the Great Game, and from the work that I've done with employee-ownership companies, is the leaders of these companies and the people involved in this kind of work, who are making an effort to make other people's lives better, that the degree of satisfaction they have with their lives is so palpable, so meaningful.

And it's been the greatest joy of my life. And why I want to keep doing this as long as I possibly can, to see people doing this, to see those millionaires, to see people say, "This changed my life." There is nothing else in your life, no amount of money, no cars, no houses, no bling, no whatever, that matches the feeling when you get that.

Steve Baker  1:07:19  

Inspirational. Corey, thank you, man, so much. Every time we talk, I learn something new. And one of the questions I didn't ask you is, "What are you reading now?" Because I figure it's probably a very intense research-based thing, and not the next Harry Potter. But I always learn something from you. And thank you so much for being here. And thanks for all you do, man.

Rich Armstrong  1:07:41  

Thanks, Corey.

Corey Rosen  1:07:41  

Thanks to everybody. And don't hesitate to get in touch with me. Go to our website or just give me a call. It's crosen@nceo.org. I'd love to answer questions. 

Rich Armstrong  1:07:54  

Yeah absolutely.

Corey Rosen  1:07:54  

Send them my way.

Steve Baker  1:07:57  

Time for us to promote one of our new products. It's the new mini-game toolkit. It's a great way to start getting people involved right now, even if you're not an ESOP. Or maybe if you are. It's a great way to get their input; people support what they helped create. It's a dynamite thing, and we've got a great price on it for you. And whether you're struggling or growing, it's all about change. And managing that, mini-games help you do that and make the most of it. And the average--now I did this math, so it is suspect, but it's pretty close--the average mini-game return in the last year as we look at everybody is about a 60 times the return on investment. I mean, it's just incredible. So that's rapid financial growth and lasting cultural change, all in 90 days. So find it along with our growth and contingency planning tool kit and other resources at greatgame.com and click on "Products." You'll be able to check that out.

Well, Rich, it's been an awesome interview with Corey, I'll tell you what. Thanks for being here with us. And guys out there in the audience, I'm telling you, let's keep the conversation going. You got to send us your questions, your ideas, your best practices, your challenges and your victories, and right now we need to hear all that good stuff, man. How are you handling all this? So like I said earlier in the interview, you guys are the new teachers. It's our responsibility to make society better. So let's do it. Let's be the backbone of the economy. Let's create those jobs. Let's invest in one another and join the global Great Game of Business community and make a global impact. See you, Rich.

Rich Armstrong  1:09:31  

See you, Steve.

 

Topics: Company Culture, Employee Engagement, Employee Ownership

About The Podcast

Hosted by Rich Armstrong and Steve Baker the Change the Game podcast highlights true life stories of organizations influencing positive change by doing business differently. They’re teaching people how business works and closing the gap between the haves and have-nots. It’s capitalism at its best. Inside each episode, you’ll discover stories of entrepreneurs who are Changing the Game.

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