Leading Companies Online Magazine

Lessons Learned and Taught
By Anthony I. Mathews, Beyster Institute Staff

As we went along, though, we got more serious and a few, perhaps actually helpful, practical lessons in employee ownership came to the surface.  Since I seem to have a long-term lease on this soap box, I thought I’d commit some of them to electronic paper here as they might be useful to some of you as well.

Lesson One: A Tactic is not a Strategy is not an Objective – and the objective is all that really counts.

Perhaps the most important lesson I’ve learned in my practice is that, correctly done, employee ownership is one of the very few situations in life that can actually be a win-win situation (or, more correctly a situation with the same number of wins as parties involved).  In almost every other business situation, there is at least one fewer win than there are players, but not so in employee ownership.  When it is done correctly, all parties involved win.  The key, though, to getting the wins and the players lined up is understanding that there is a range of objectives in play in every life situation (and that is no less so in employee ownership situations) and that to get the win-win-win going requires planning around all of them.  After all, a loss in any context is just an unrealized expectation – an objective denied.

Obviously, then, in order to form win-win-win planning it is most important to recognize and identify all the objectives in play.  But, that is not as easy as it sounds. 

Many times over the years, I have come into situations where the people involved were exposed to the ESOP concept as a solution to their “problem” and then dove in with both feet (and lots of money) before they really thought through all the implications of what they were doing. 

In one such case, a business owner adopted an ESOP as a way to facilitate his own retirement.  He assumed that the plan would work to transfer the business to his protégé, but that isn’t at all what happened.  With all good intentions, what he managed to do was set up a program that excluded the very person he most needed to run the company after he left, and worse yet, he created a program that seriously damaged that same successor’s personal net worth.  Several years later, the tension of these problems was still dominating the company’s sense of the program and the plan was eventually terminated. 

The problem was that his planning had been dominated by a tactic rather than a process of choosing tactics to implement a strategy that was built around the whole range of objectives that needed attention.  You can’t design strategies until you fully understand all the objectives in play and you certainly can’t choose tactics until you have a well planned strategy

Unfortunately, most of your planning resources will work with your objectives only tangentially, if at all.  In general, articles and “how to” books as well as most seminars that I have seen are set up to present strategies.  An estate plan or a business succession plan are good examples of strategies.  At the same time, most, if not all, of your professional advisors make their living selling tactics.  An ESOP or a Life Insurance Trust are good examples of tactics.  If you start out developing a strategy or worse, implementing a tactic before you have a clear understanding of the objectives of all the parties, the end product will almost certainly be unsatisfactory.  And this is no less true in the employee ownership arena than anywhere else.

Martin Staubus, Beyster Institute Director of Consulting

Let’s think for a minute about what an objective might be in an employee ownership setting.

So, the objectives are, at the same time, the most important part of the process, and the least likely to be directly addressed in the beginning.

Let’s think for a minute about what an objective might be in an employee ownership setting.

Nobody ever woke up in a cold sweat with an overwhelming need to have an ESOP or an estate plan.  But people do lose sleep (and sweat) over what will happen to their family in the event something happens to them.  People do care about the charities and other valuable institutions that they support, and people do care about what happens to the employees who have helped to make them wealthy.

So, a list of objectives might be:

1. Arrange a reasonable income stream for me (the company founder) and my spouse for the rest of our lives.
2. See to it that the wealth we have created in our lives is handed down fairly to our children.
3. Take care of the employees who have worked with me for so long to make my business grow.
4. Help my college or church carry on the good work into the future.
5. Make sure my spouse’s uncle Harry doesn’t get his hands on a dime.

And, tongue only slightly in cheek, all those objectives are equally important to the planner.

But even that doesn’t complete the picture. 

Objective setting in the employee ownership arena is even more complicated by the fact that there are many layers of people who are important to the success of an employee ownership program, each layer with its own objectives. 

The founder of the business (or selling shareholder as they are often dubbed) may well have a list like the above, but equally important to the long term success of the program, the founder’s family will have their own objectives. 

The management of the company will certainly have objectives of their own and they may or may not be compatible with yours, but without the management team on board, it is very unlikely that your strategy will perform as you intend. 

Even within the ranks of management and employees, there may well be great divisions of objectives between long-term people nearing retirement, who really need to have their retirement accumulation available in the short term, and younger employees whose retirement value can be created over a longer period of time but whose focus is most often on taking current income.  A successful employee ownership transition will need most members of both of these groups to hang in there, but it is often a very difficult design problem to make this happen.  In fact, even the best designed transactions will lose some people in the transition, but even that is less of a problem if you can see it coming.

The bottom line is, in order to be really successful, any plan must take into account as many of the important objectives as possible.  And, identifying all those objectives is probably going to be your responsibility.

I always encourage clients to have a general face to face meeting including (not necessarily at the same time) all the people who have a stake in the outcome of your project.  The point of the meeting is for the person initiating the planning to sort out as many of the objectives as possible and to note which groups, if any, will be unhappy with the strategy or the tactics you are contemplating.  This will not only cut down on unnecessary travel down roads that don’t take you where you want to go, but it also may head off the surprises at Thanksgiving dinner when you realize that because of your brilliant business succession strategy your children are not talking to you and your spouse’s uncle Harry is ordering a new Bentley. 

Next time around, we’ll look at:

Lesson Two: 75 percent of all results are unintentional – with careful planning you might be able to lower the percentage to 45 percent.

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