“[Jack Stack’s] open-book approach is generating intense interest among businesses large and small. . . . About 1,500 companies, including many Fortune 500 concerns, have toured [SRC] to learn about the merits of disclosing everything to rank-and-file workers.”
–The Wall Street Journal
“The results at SRC are nothing short of breathtaking. The Great Game has resulted in one of the most competitive companies I've come across in all my years at Inc.” –George Gendron, Editor in Chief, Inc.
A Stake in the Outcome: Building a Culture of Ownership for the Long-Term Success of Your Businessby Jack Stack, Bo Burlingham
The First Management Classic of the New Millennium!
A bold experiment is taking place these days, as leading-edge companies turn upside down the management paradigm that has dominated corporate thinking for more than one hundred years. Southwest Airlines is perhaps the most visible practitioner, soaring through economic downturns while its competitors/b>
The First Management Classic of the New Millennium!
A bold experiment is taking place these days, as leading-edge companies turn upside down the management paradigm that has dominated corporate thinking for more than one hundred years. Southwest Airlines is perhaps the most visible practitioner, soaring through economic downturns while its competitors slash their budgets and order massive layoffs, but you can find other pioneers of the new approach in almost every industry and market niche. Their secret: a culture of ownership that allows them to tap into the most underutilized resource in business today–namely, the enthusiasm, intelligence, and creativity of working people everywhere.
No one knows more about building a culture of ownership than CEO Jack Stack, who’s been working on one for the past twenty years with his colleagues at SRC Holdings Corporation (formerly Springfield ReManufacturing Corporation). Along the way, they’ve turned their company into what Business Week has called a “management Mecca,” attracting thousands of people representing hundreds of businesses to SRC’s home in Springfield, Missouri. There the visitors learn how to incorporate the ideals and values of SRC’s remarkable corporate culture into their own organizations–and then they go back and do it.
Now, in A Stake in the Outcome, Stack offers a master class on creating a culture of ownership, presenting the hard-won lessons of his own twenty-year journey and explaining what it really takes to build for long-term success. The pioneer of “open-book management” (described in the best-selling classic The Great Game of Business), Stack and twelve other managers began their journey in 1982, when they purchased their factory from its struggling parent company. SRC grew 15 percent a year, while adding almost a thousand new jobs, and the company’s stock price rocketed from 10 cents to $81.60 per share. In the process, Stack discovered that long-term success required constant innovation–and that building a culture of ownership involved much more than paying bonuses, handing out stock options, or setting up an employee stock ownership plan. In a successful ownership culture, every employee had to take the fate of the company as personally as an individual owner would. Achieving that level of commitment was extraordinarily difficult, but Stack realized that the payoff would be enormous: a company that was consistently able to outperform the market.
A Stake in the Outcome isn’t about theory–it’s about practice. Stack draws from his own successes and failures at SRC to show how any company can teach its employees to think and act like owners, including how to implement an effective equity-sharing program, how to promote continuous learning at every level of the organization, how to fire up employees’ competitive juices, how to broaden the concept of leadership and delegate responsibility for the business, and how to build a workforce that is fast on its feet and ready to take advantage of every opportunity. You’ll also learn about other companies that have succeeded in building cultures of ownership–and the lessons they can teach the rest of us.
Written in Jack Stack’s straightforward, witty, no-beating-around-the-bush style, A Stake in the Outcome is like having a one-on-one session with a master entrepreneur and business innovator. It shows managers and executives of companies both large and small how to build a ferociously motivated workforce that is energized and committed to meeting and overcoming the most daunting challenges a company can face.
“[Jack Stack’s] open-book approach is generating intense interest among businesses large and small. . . . About 1,500 companies, including many Fortune 500 concerns, have toured [SRC] to learn about the merits of disclosing everything to rank-and-file workers.”
- The Crown Publishing Group
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Read an Excerpt
1 A Culture of Ownership
There's a great experiment going on in business today that involves literally thousands of companies and millions of people, but it's one of the best-kept secrets around. I know about the experiment because my company, SRC Holdings Corporation (formerly Springfield ReManufacturing Corporation), is part of it. For twenty years now, my colleagues and I have been trying to develop a particular type of culture at SRC. In the process, we've come into contact with thousands upon thousands of people who are trying to do the same thing at their companies.
A lot of those people have visited us in southwestern Missouri. By conservative estimates, we've had more than 4,600 people from 1,600 companies come to see what we're doing and learn about the Great Game of Business, the management system we've developed to teach everybody in our company about business and to turn our employees into owners. That's prompted Business Week to label SRC a "management Mecca." Another 5,000 people from 1,700 companies have attended the various conferences we hold for current and would-be practitioners of open-book management, which is the generic term for what we do. There we've been joined by our kindred spirits in the corporate world, including some of the most revered companies aroundSouthwest Airlines, Harley-Davidson, VeriFone, Outback Steakhouse, AES Corp., Whole Foods Market, Kingston Technology, and ServiceMaster, to name a few.
Meanwhile, the book we wrote about our management system in 1992 has sold more than 200,000 copies and been translated into Russian, Spanish, Hungarian, Chinese, and Korean. People have applied the principles of the Game to an awesome array of businessesfrom oil companies to hair salons, from Internet start-ups to roller coaster manufacturers, from fast-food chains to law firms, landscapers, mining operations, even not-for-profit social service organizations.
Not just in the United States, either. SRC has become famous in places we once barely knew existed. There are companies in Zambia and Malaysia that practice the Great Game of Business. The Australian 60 Minutes did a segment on our company, and it became one of the program's most requested videotapes. Delegations have come to see us from as far away as India, South Africa, Singapore, the United Kingdom, Sweden, Japan, whereverall interested in finding out as much as they can about the way we do business.
At a certain point, you have to ask yourself, Why? What could all these people be looking for, and why would they trek all the way to the Ozarks to find it? I like to think of SRC as a leading-edge business, but let's face it: We're not a high-flying star of technology, and we don't live in a hot zone of the new economy, or even a major metropolitan area. While we have our own Internet-based subsidiary, most of the companies we operate are involved in the making and selling of engines and engine components, an old-economy industry if there ever was one.
Nor can you explain the interest by our business sucess alone. Yes, we've done well. A share of SRC stock that was worth 10 cents in 1983, the year we started, had an appraised value of $81.60 as of January 31, 2001, and increase of 816, 000 percent in eighteen years. During that time, we've grown from $16 million to $160 million in sales; from 119 to more than 900 employees; and from one company to 22. After losing $60,000 in our first year, we've had seventeen straight years of unbroken profits. It's a good record, and I'm proud of it, but many companies can marshal equally impressive growth statistics, and they don't all acquire the kind of notoriety that we have.
There are some other numbers, however, that I suspect get closer to explaining why people come to Springfield to see us. When we started in 1983, we had just thirteen shareholdersme and the twelve other managers who'd scrounged around and come up with the $100,000 we needed to make a down payment on the factory where we worked. Today we have 727 shareholders, all employees, just five of whom have stock from the original buyout. The other 722 shareholders own 64 percent of the business, valued at $23 million.
That transfer of ownership is the result of an odyssey we began two decades ago. During that time, we've worked long and hard to foster an environment that brings out the best in people, giving them the confidence, the courage, and the self-esteem to do what they're capable of. How? Mainly by trying to be as loyal to them as they've been to the business by creating a place where they can feel more secure.
There's a level of mutual trust and respect at SRC that doesn't exist in a lot of companies. It comes from everything we've done to build our culture. It comes from being honest with people, from telling them about the realities of business, from having principles and sticking by them, from trying to be fair. I suppose it's also important that we've avoided mass layoffs, but it's more important that we've done it together, by keeping our promises to one another, by living up to our mutual commitments. We've treated people like the capable, intelligent adults we know they are. We haven't protected them like children. We've created a society built around rules we all know and understandsome of which we've developed, but many of which we've gotten from the marketplace. They're the basic rules of business, the things we have to do to survive and prosper in a competitive economy.
Out of all this has emerged a special kind of corporate culturewhat I think of as a culture of ownership. It's that culture, I believe, that is drawing all those people to Springfield. They want to see it, feel it, smell it, taste it, and they want to find out how to create something similar in their own companies.
The Definition of a Culture
So what exactly is a culture of ownership, and where does it come from? The term, I admit, is tricky to define. It’s a little like what a Supreme Court justice once said about pornography: It’s hard to say exactly what it is, but you know when you see it. By that standard, if no other, we can all think of companies we’re familiar with that have an ownership of culture. Southwest Airlines comes to mind. Harley-Davidson and Home Depot do as well. So, for that matter, do Herman Miller, the $2.2 billion furniture maker, and Whole Foods Market, the $1.8 billion natural foods grocery chain, and Science Applications International Corporation (SAIC), the $5.9 billion, employee-owned defense contractor.
Each of those companies has a distinctive corporate culture you quickly become aware of when you walk into one of their facilities or spend time with their employees. There’s a sense of pride, identity, direction, and purpose. People know they’re part of something bigger than what they do on a day-to-day basis. They belong to something, and it belongs to them. They have ownership, and it’s a two-way street.
But while most people can recognize an ownership culture when they see it, they have many misconceptions about what it takes to develop one. There’s a common belief, for example, that it’s all about owning stock. Equity-sharing certainly plays a crucial role, but you don’t get an ownership culture simply by giving stock to employees. We’ve seen a lot of that in recent years, and more often that not the result has been disappointment and misunderstanding.
Part of the problem has been the tendency of companies to use stock merely as a form of compensation–a carrot to get people to work harder. In a company with a strong culture of ownership, stock is more than compensation. First and foremost, it’s a vehicle for change. The goal is not just to reward people for the work they do, or to maximize profits for their own sake, or to enhance shareholder value, improve cash flow, whatever. Rather equity is used to involve people in the process of making a difference in the world.
Why? Because business is not an end itself. It’s a means to an end. It’s a tool that allows us to accomplish the things that matter most to us, and those things must transcend business to have real meaning and value. The precise nature of those loftier goals will vary from company to company, even from person to person, but you must have them. They are what makes ownership worth caring about.
And to be an owner, a true owner, you have to care. Owners do not follow a job description. They don’t just put in their time. They have something bigger they’re working toward, and they feel a sense of responsibility about accomplishing it. They go beyond mere problem solving and look for creative, innovative ways to reach their goals. They are independent-minded, freethinking people, leaders not followers, and they know how to take the bad with the good. Indeed, they’re often at their best when the going gets tough. They have what it takes to reach down and find the inner sources of strength that allow them to keep moving forward, no matter what gets in their way.
At SRC, we wanted to have a culture that would draw out those qualities in the people who work here. But to build such a culture–and to sustain it–you must also have a company that comes on the promises it makes to its employees. It’s relatively easy to create an illusion of ownership by handing out stock or stock options. It’s far more difficult to give people the tools they need to realize the rewards that ownership can provide.
We’ve been trying to figure out how to do that for the entire time we’ve been in business. It has been a long, slow, difficult journey, filled with pitfalls and obstacles, and we haven’t yet reached the end of it. Perhaps you never do. But we’ve been able to overcome a lot of the obstacles, mainly because we’ve put so much effort into teaching people about business, creating mechanisms that have allowed them to learn about the complexities of ownership as they’ve been engaged in the process of building an enduring company.
Those mechanisms are the building blocks of the Great Game of Business.
I want to be clear about what I mean by the word mechanism. I’m talking here about a regular process, program, or routine that has become an integral part of our management system–our 10-20-30-40 bonus program, for example, our high-involvement planning process, or our weekly hurdles. We wrote about several mechanisms (including those three) in our first book, The Great Game of Business. Since then, we’ve developed several more, some of which we’ll discuss later on in this book.
All of these mechanisms serve more than one function. To begin with, they’re management tools. The bonus program provides incentives to achieve certain goals; the planning process produces an annual plan; the huddles are essential means of communication; and so on.
In addition, the mechanisms allow us to delegate a tremendous amount of authority and responsibility by giving people the information they need to make decisions that are in the best interests of the company, both short and long term.
Then, too, the mechanisms embody our values and transmit our culture to new employees. With the weekly huddles, the scoreboards and charts on the walls, the constant chatter about hitting targets, it doesn’t take long for someone to figure out what we stand for.
Those are all valuable functions, and I could probably come up with others. It’s important to understand, however, that by far the most critical function of the Great Game mechanisms is education. They are the tools we use to promote continuous learning in every corner of the organization. They are the means by which we make informal business training a regular part of our day-to-day routines.
Let me say a few words here about informal training, which I’ve always found to be better, cheaper, and more effective than formal training.
I like to use a fishing analogy. You can do all the research in the world on bass fishing. You can find teachers who’ll tell you everything they know. You can read every fishing magazine, study every fishing book, and watch Jimmy Houston on ESPN. But it won’t mean anything until you go on a lake and start throwing a lure. When you feel that first bite–or have the first backlash–you’ll begin to learn about fishing.
I’m not saying that formal instruction is worthless, just that it’s over-rated. According to an authoritative study conducted by the Center for Workforce Development, formal training programs account for only about 30 percent of what people know about their jobs. The rest they pick up informally from the people they work with–at the coffee machine, in the lunchroom, during breaks on the floor.
Those findings aren’t as surprising as they may seem at first glance. Think about how it works in most organizations. When new people come in, they usually get some kind of job orientation. Somebody explains their benefits and tells them what’s expected on the job. But who gives them their real orientation? How do they find out what’s really expected? They learn, right, but not in any formal training session. I’m reminded of a story I heard once from a guy who worked in a giant automobile factory. I’d asked him how new employees find out what they have to do to be successful. “It’s real simple,” he said. “Somebody tells them, ‘Keep your nose clean for ninety days, and you’ll have a job for life.”’ Talk about transmitting a culture.
The point is that job-related learning goes on whether or not we’re aware of it. People learn through a whole series of events that most companies don’t even recognize, and so they never figure out how to leverage the process. They don’t see how much training you can do outside of any formal training program.
I believe that people learn when they participate in games or work in teams. People learn when they have meetings or interact with customers. When you talk with your supervisor, you learn. When you mentor another employee, you learn. When you report to your peers, you learn. When you come up with a replacement so that you can move on to another job, you learn.
That’s the informal training process. Through it, people learn interpersonal skills–how to communicate, how to handle themselves in a group, how to deal with different personalities. They learn to fit into the company’s culture, how to live up to expectations. They learn how to innovate, how to create new products and services. They acquire the practical skills they need to do a particular job, as well as the mental skills they can use wherever they go: the ability to solve problems, to think critically, to integrate task, to compete and win. Some people are extraordinary at winning. Why? Mainly because they’ve learned how–through informal training.
This is a critical point that, for some reason, I have a hard time getting across to people who want to understand the success of our management system. They focus on the design of the bonus program, or the selection of a critical number. They think it’s all about finding the right incentives. Wrong. It’s all about leveraging the informal training process, using the regular routines of the company to promote continous learning. A bonus program may help you hit certain goals and put some money in the pockets of your employees, but you’ll miss the greatest potential benefit if you don’t make the connection to learning.
I don’t believe you can build a durable ownership culture without some such system of ongoing business education. Nobody can think and act like an owner without understanding the basic rules of business, and to teach people those rules. We start with the idea that there are two things every company must do to stay in business: make money and generate cash. Through the informal training mechanisms of the Game, employees learn about all the subtle and not-so-subtle challenges of doing those two things in the various industries in which we compete. From there, people move step-by-step up the ladder of business complexity, eventually confronting the ultimate challenge of building an enduring company capable of transferring ownership–and wealth–from one generation of owners to another.
And the system works. It works brilliantly. People really do wind up with a damn good business education–whether or not they realize they’re getting one at the time. In the nineteen years since we started the company, we’ve had dozens of employees rise from the shop floor and the customer-service desk to top management positions, and they’re far better qualified than a lot of MBA’s I see.
I don’t mean to suggest that our line employees are the only ones being educated, either. I think I’ve learned more than anyone through our system. Then again, most our managers would probably say the same thing. What’s more, none of us would have received that education if we’d relied on formal training to do the job.
When you open your books–really open them–you also open your mind, and neither your mind nor your books will be closed again. Why? Because you’ll keep discovering things about yourself and your company you wouldn’t have known otherwise.
Business is an unfolding drama. You never reach a point at which you “understand” it in the sense of having all the answers. There are always new questions to consider, new discoveries to make, new problems to confront and mysteries to solve. To be good at business, you need to be continuously learning–even if you’re Jack Welch. And you need to be extremely good at business if you want to build a company and a culture that will carry and prosper long after you leave.
The First Rule of Ownership
There’s another vital role that the Great Game of Business plays for us. It’s the means by which we keep people focused on the fact that we’re building a company, not just making products. In the process, we continually remind them of, and link them to, the higher goals behind SRC–the reasons why we’re in business.
You absolutely must have some system for doing that if you want to build a culture of ownership. The system doesn’t have to be the Great Game of Business, although you’re more than welcome to use it if it suits you. Southwest Airlines, Harley Davidson, Herman Miller, Whole Foods, and SAIC all have their own systems, which are very different from the Great Game and from another. But you must have some way of getting people to think in terms of the company they’re building and the higher goals they’re striving toward, rather than just the products and services they’re delivering.
Don’t get me wrong. I’m well aware that every company has to design, make, and sell things customers want to buy. Otherwise you won’t have a business. I’m also aware that great companies tend to be known for their great products and services. But they’re the result, not the cause, of greatness. Inspired people can do incredible things. The question is, where does the inspiration come from? In an ownership culture, it comes from building the kind of company that can let you achieve your higher goals.
That’s a fundamental rule of ownership, and I can’t emphasize it enough:
OWNERSHIP RULE #1
The company is the product.
If you want to build a culture of ownership, people have to understand that they have a direct role to play in creating the kind of company they want, and that creating such a company is their responsibility and the ultimate goal of the enterprise, the end result of all their efforts.
Now, you might thingk that such a rule would be easy enough to get across to people, but it isn’t. In fact, it usually requires a huge change in the consciousness of employees. Most of them, after all, have grown up either in the old industrial economy or in institutions that operate by its rules and norms. Even many of the self-proclaimed “new economy” companies are managed internally a lot like their old economy forebears. By that I mean that everybody except the senior executives is encouraged to have a narrow focus. Job descriptions, work rules, accountabilities, performance reviews, individual bonuses–they’re all designed to making people think in terms of doing the job, performing the function, getting the product out the door. Only the top people are supposed to worry about the company as a whole.
So when you set out to create an ownership culture, you wind up having to fight against all the habits of mind that people have developed in those old-economy environments. You also have to fight against the ways people have been trained to think about their roles.
Most managers, for example, assume that a major part of their job is to manage people. But you can’t manage owners, and most people don’t like to be managed anyway. One of the basic flaws of traditional management thinking is its emphasis on managing people, which leads companies to spend billions of dollars on implementing management flavors of the month–producing what? A lot of cynicism and resistance to change, and maybe only a few good laughs in Dilbert. The alternative is to have a system that allows people to manage themselves.
I’m not being naïve here. I realize that everyone won’t automatically buy into that concept. But many people will–more than you might expect–and the rest can be challenged to making a choice. Do they want to be worker bees or leaders? It doesn’t matter what job they hold. They can still be leaders. They can choose to lead by taking responsibility for themselves, seizing the opportunities that the company has to offer, reaching out for their own higher goals–even if they’re front-line employees being paid an hourly wage. We have hourly people who’ve made tens of thousands of dollars by saving up their money and taking advantage of the chance to buy stock in the company. Then again, we also have people who’ve passed up our stock offerings–and lived to regret it.
In an ownership culture, you need to broaden the concept of leadership and delegate leadership. You need to work on developing leaders at all levels of the organization–improving business knowledge and skills, giving people ownership of the job and responsibility for its execution, pushing them to make decisions, encouraging everyone to reach out and move up. You want a workforce full of people who are fast on their feet and ready to take advantage of the opportunities that come along. That’s the only way a company can achieve its strategic goals.
And what do you do if you happen to be a manager in such a company? You challenge people. You encourage them. You tell them the truth. You try to help them understand reality. But you don’t manage them, at least not in the traditional sense.
Instead you manage the system. You make sure you’re using the mechanisms you’ve developed, and you look for ways to improve them. You keep measuring and analyzing the results. You constantly ask whether or not you need new mechanisms and, if so, which ones.
Because the system is never finished. There will always be parts of it that need fixing or upgrading, or that haven’t been invented yet. There will be, that is, as long as the world keeps changing.
So somehow you need to quantify the performance of your ownership culture, if only to determine how well your system is working. At SRC, we measure success by the growth and retention of people and the growth of the company. If we have a high turnover, or if our people aren’t learning, moving up, taking on new challenges, then there’s something wrong with our system and our culture. Unless we fix the problem, moreover, we’ll be selling ourselves short, not to mention missing out on the long-term business opportunity.
Why? Because, in the future, companies will increasingly be valued on the basis of their people. It’s inevitable given the changing demographics of the workforce. Forget about the latest downturn. Economic slumps will come and go, but the population will keep on aging, the employee pool will keep on shrinking, and the competition for talent will intensify. If companies want to maximize shareholder value over the long term, they have to focus on the growth and retention of their people, and there’s no better way to do that than by building a successful ownership culture.
Psychic Ownership and “Real” Ownership
At this point, you may be wondering, “What about equity? If you can get all these wonderful benefits by having an effective management system, why bother sharing stock at all?”
That’s a good question. In fact, I know a lot of companies that have implemented the Great Game of Business, or something very much like it, without actually giving employees an equity stake in the company. By and large, the results have been excellent. Not only has the company performance improved, often dramatically, but morale and employee retention have risen as well.
When you spend time in one of those companies, you can’t help but be struck by the employees’ spirit, loyalty, and knowledge of the business. They talk and act as if they really are owners. What’s more, they clearly feel that, on some level, the company is theirs, and they’ll tell you so if you ask them.
That’s what I think of as psychic ownership. It comes, I believe, from the sense of community that develops when you treat people as responsible adults, capable of understanding how the business works, looking out for its best interest, and contributing to its success. Just by implementing a well-designed open-book management system, companies demonstrate trust and respect, and then the educational process kicks in, transforming both the culture and the behavior of employees–not all of them–but a certain critical mass. Along the way, they become extremely possessive of, and deeply loyal to, the company and its culture.
Psychic ownership is important. It’s an essential component of an ownership culture. I hold in high regard any company that has earned such trust and devotion from its employees. But psychic ownership doesn’t help a company deal with the biggest issues it faces–like succession. I also believe that businesses miss out on the real potential of ownership if stock is not part of the deal.
Equity is, in fact, a kind of a contract. It defines the terms of a shareholder’s relationship to the company that issues the stock. When people get stock in the company they work for, they have something real in their hands, a guarantee that they’re going to receive a portion of the wealth they help create. What happens to the stock, and what they ultimately get out of it, are different matters, but they do have the promise in writing, and no one can take it away from them.
Out of that contract comes all the wonderful things that equity is capable of providing. It’s one mechanism that can absolutely change people’s lives. It can make their lot easier. It can help them send their children to college. It can enable them to buy a home. It can support the charities they care about. It can give them something to look forward to in retirement. It can significantly enhance their quality of life in many ways.
And yet there’s more to equity than simply the rewards people get from it, because they can receive those rewards only by working together to build something of value. You need a group of people to create a company whose stock can be bought and sold. It’s almost impossible for anyone to do it alone.
So equity-sharing is about defining the community. It’s about what one person can do for another person. It’s not just a set of rewards; it’s a reward system. People come together, struggle together, build something together, and enjoy the benefits together. Yes, there are hardships along the way. Life is full of hardships. But when people are working toward a common goal, they can rise above the hardships. They can put aside the petty issues and think at a higher level. They can realize how important they are to one another, and come together as a team, and create something better than what existed before. Because people have hope. They have something to look forward to in their lives.
In the process, you get a place that more nearly resembles how you’d like the world to be: a nicer place, a place where people are a little more equal, and so you have a little less envy and guilt. It all comes out of this reward system.
I don’t mean to paint too rosy a picture here. Ownership is not all fun and games. You try to have as much fun as possible by creating opportunities to win, but an owner has to learn how to deal with the bad as well as the good. Why? Because being an owner involves responsibility–for making payroll, for protecting jobs, for fulfilling commitments, and so on. You give people ownership in part because you want them to share and accept that responsibility.
The question is Can they handle it? Have you created a culture that enables them to handle it? Any company can do well when times are good. It’s in bad times that we find out what businesses are made of.
SRC is actually at its best in bad times, and I believe it’s because of ownership. We know how to come from behind because we’ve done it so often in the past. Whenever the going has gotten tough, we’ve been able to draw together as a family, figure out what has to be done, and then go out and take care of business.
I doubt that would have happened if a few of us had kept all the stock to ourselves. The other people would have always felt (correctly) that they were working for someone else. By sharing equity, we put everybody in the same boat, and so we could make sure we all were pulling together when the seas grew rough. As a result, we learned we could handle adversity. It tested our mettle and made us stronger.
You miss all that when you settle for psychic ownership or try to get by with phantom equity, which is really just a long-term bonus program. No matter how loyal and motivated psychic owners might be, they aren’t complete owners if they don’t also have an equity stake, and sooner or later the limits of their ownership become apparent. They hit a wall in their education. They may become better employees, but they never encounter the biggest challenges of ownership, and they don’t share in its rewards. In the end, it’s equity that provides the ultimate economic payoff of business. Unless employees are responsible, not just for helping the company make money, but also for building its equity value, there will always be a division between the “real” owners and the psychic owners, and over time that division will undermine the culture, stunting the growth of the business and that of its people.
And no one’s growth will be stunted more than that of the owners who keep the stock to themselves. I speak from experience here. My entire education as a businessperson has come from struggling with the challenges of making employee ownership work. It boggles my mind to think what I would have missed if we hadn’t taken this route.
In the beginning, I knew nothing about business. My partners and I didn’t even know how to define success. We thought it was just a matter of surviving. At one point in our first year, we had $89 million in debt, against just $100,000 in equity, and barely enough cash to scrape by. So we figured out how to make do with what we had. Through the Great Game of Business, we taught everybody in the company what it takes earn a profit and generate cash in an operating business. The result was that we paid down our debt and watched our stock value soar.
But just when we thought we were out of the woods, we discovered a whole side of business we hadn’t known about before. It isn’t enough to create wealth; you also have to be able to pay for it eventually. In our early years, we’d created a lot of wealth–on paper. What were we going to do when it came time to cash the paper in?
So began the next phase of our journey, which proved to be both the most difficult and the most rewarding. By having to come up with a plan for cashing people out, we were forced to change the entire way that we looked at our business. We had to learn how to view it objectively, to see it as an investor would, from the outside in, and we had to develop a long-term perspective. Clearly, we were going going to need a ton of cash in the years ahead to cover our obligations to shareholders. The more successful we became, the more cash we’d need. Somehow we had to figure out how to generate it, not just now, not just this year or next year, but on and on into the future. We had to create a repeatable pattern that would guarantee we’d have money to pay shareholders when they were ready to leave.
It took more than a decade to come up with the pattern. Along the way, a funny thing happened. We learned the fundamentals of good business. We learned what it really takes to succeed under capitalism. We learned how to create new businesses and how to get people ready to run them; how to generate new sources of cash flow; how to do alliances; how to buy and sell companies; how to turn customers into partners; how to increase the price-earnings multiple on our stock; and on and on. Above all, we developed the courage, the character, and the conviction to be able to handle the future. We figured out how to build certain disciplines into the organization that would get people thinking ahead, thinking strategically, thinking as far into the future as we could go. So as expensive as our equity was, having to pay for it turned out to be the best thing that ever happened to us.
Meanwhile, the world was changing around us. When we began our journey, it was considered a radical idea to share ownership and financial information with employees. Now both practices are commonplace. Almost 20 million people are covered by some sort of broad-based equity-sharing program these days–more than 15 percent of the private-sector workforce–and the numbers are still rising fast. As many as half of all private-sector employees could have stock in their companies in the coming years. And even companies that don’t share equity search for ways to instill an ownership mentality in employees, encouraging them to “think and act”like owners,” as the phrase goes on.
At SRC, we’ve come as close as anyone to figuring out how to do that, but it’s taken twenty years. I think back to the pessimistic times at the start of our journey, when we’d get daily reports of factories closing and people losing jobs, communities being devastated, and I realize how far we’ve traveled. We were just a bunch of working stiffs back then. We had only some values we felt we had to live by and a few crazy ideas about how businesses ought to be run. We didn’t understand ownership. We’d never heard of employee stock-ownership plans or open-book management. When we tried those things, we didn’t know how, or even if, they would work.
But we believed we had to give them our best shot. We had to see if it was possible to build a business around the same democratic values we’d grown up with and come to expect in every part of our lives. We had to find out whether or not you could share the rewards of ownership, be open with information, treat people with dignity and respect, educate yourself and everyone else, and still have a successful company.
As it turns out, you can–but it ain’t easy.
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