ESOP's Fables

Jack Davidson, one of the founders of the Trust Company of Vermont, says the decision to vest ownership of the firm in its employees stemmed from a simple realization: “Whoever owns you determines your fate.”

The same premise underlies the 30 other businesses in Vermont that are wholly or partly owned by their employees. That's not a sizable portion of companies even in this small state, and it's also not a large number in relation to the 11,000 employee-owned businesses now operating in the United States. But the Vermont roster does include a few familiar names: King Arthur Flour, Gardener's Supply and Carris Reels, for example.

Nationally, giant corporations such as United Air Lines, Procter & Gamble and Anheuser-Busch have been put at least partially in the hands of their workers.

The number of such businesses is growing steadily in Vermont. Stephen Magowan, a Burlington attorney specializing in transitions to employee ownership, says he gets an average of three calls a week from Vermont proprietors who are thinking of transferring a firm's title to its workers. He attributes the upwelling of interest to “a culture of sharing in Vermont.”

Ben & Jerry's popularized a business model based on more than just maximizing profits, Magowan says. He further notes that King Arthur Flour, founded in 1790, and 50-year-old Carris Reels, which employs 500 people in Rutland and other locations, are known throughout the Vermont business community as examples of companies that have successfully moved toward employee ownership.

Many of the inquiries Magowan receives are motivated by a desire to ensure that a business remains in Vermont after its individual or family owner passes from the scene.

For some clients, an ideological or spiritual commitment is an even stronger factor, adds Magowan, a partner at Gravel and Shea. It's usually phrased in terms similar to those used by Paul Millman, vice president of the Chroma Technology Corporation in Rockingham, who believes that “employees involved in creating the wealth should certainly share in the wealth.”

Millman notes that he was raised in a household of socialists in Brooklyn.

There are many ways to achieve that outcome, Magowan tells his clients. The most common options include an employee stock-ownership plan (ESOP), transformation of a company into a workers' cooperative, or a more open-ended “third way” such as was taken by Chroma Technology.

The 12-year-old company manufactures optical filters used in biomedical research and clinical work. Its worldwide sales have increased 150 percent during the past five years, reaching an annual total of $15 million, Millman reports. Chroma's six founders initially divided the firm's ownership among them, and have extended it to all 68 current employees.

At first, Millman says, decisions were made in accordance with a “Quaker consensus model.” That proved too time-consuming, so a one worker/one vote form of democracy was adopted instead. It worked well, Millman recounts, until the time came to decide whether to relocate the company to New Hampshire.

Chroma would today be based on the eastern side of the Connecticut River if the one worker/one vote system had remained in effect, he says. But after it became clear that only one of the six founders favored a move to New Hampshire, the company adopted the share-based ownership plan that it continues to follow.

Each year, Chroma pays workers a bonus that is to be used to purchase 200 shares in the company. Voting power is keyed to share size, so workers with the most seniority have the greatest say. Strategic decisions are made by the company's board, which consists of the six founders as well as three members elected by all the workers.

Chroma's set-up differs from an ESOP in that employees are able to cash out up to 25 percent of their shares with no penalty while they are still working. Millman explains that the firm rejected the ESOP approach because “it's essentially a retirement plan and expensive to manage.”

The co-op model was discarded because of its one worker/one vote formula.

ESOPs remain the most common method of moving from personal to collective control over a company – not least because of the tax savings that this mechanism affords.

King Arthur Flour, Carris Reels and Gardener's Supply have all taken the ESOP route, with workers now owning between 30 and 70 percent of those respective companies' shares. Most of the nationwide corporations owned at least in part by employees also chose the ESOP option, which was devised in the 1950s by economist Louis Kelso.

The co-op form was judged preferable by a few worker-owned businesses in Vermont, such as Island Pond Woodworkers. That company began operating early this year following the shutdown of the Ethan Allen furniture factory, which had been one of the largest private employers in the Northeast Kingdom. Island Pond Woodworkers now has 14 worker/members, most of whom lost jobs when Ethan Allen closed.

“We want to be a successful business that's responsive to its workers and also respectful of the environment,” says Bruce Wilkie, vice president for marketing and sales.

The company's niche lies in the manufacture of furniture from sustainably harvested wood felled in the forests of northern New England. Island Pond Woodworkers is getting orders from institutions eager to encourage that mode of production as well as the company's cooperative structure.

In addition to making chairs for St Michael's College and carrels for the new library at Middlebury College, the company has an arrangement with Dartmouth College to produce a logo-embossed line of “Dartmouth alumni furniture.” Much of the wood used by Island Pond comes from a vast forest in New Hampshire owned by Dartmouth.

The co-op model was chosen, Wilkie says, because the founders of Island Pond Woodworkers wanted to avoid the sense of alienation they felt at Ethan Allen.

“I personally feel a lot more comfortable now when I approach managers with concerns and suggestions,” says Wilkie, who worked at Ethan Allen for 26 years. “At the monthly co-op meetings, there's no fear of retribution when someone makes a criticism.”

Cooperative-style decision-making is working well at Island Pond, Wilkie says. The firm is only nine months old, however, and might eventually experience a crisis of the sort that caused Chroma to abandon this form of employee ownership.

Fear of “chaotic democracy” is the most common misgiving voiced by individual owners considering a shift to employee control, according to attorney Magowan. Acknowledging that risk, he says it is important that a new set of managers be trained to work in an employee-ownership environment as part of a company's transition away from top-down control.

Magowan says he also reminds prospective clients that worker-owned companies will have to operate in accordance with fundamental principles of capitalism in order to compete successfully with traditionally structured businesses.

“There needs to be an understanding that you can still be fired if you don't work well,” Magowan says.

Some employee-owned firms have devised means of making decisions in an expeditious manner that still honors the precepts of self-governance. Trust Company of Vermont, for example, makes use of a private Intranet that allows the 15 employees to be quickly polled on a pressing business issue, co-founder Davidson says. The process must be working fairly well, since the Brattleboro-based fund has $350 million in assets under management four years after its launch.

Don Mayer, CEO of Small Dog Electronics in Waitsfield, has no doubts about the wisdom of transferring control of his company to its employees. He says he arrived at that decision through a process of elimination.

As Mayer, 54, approaches retirement, he has the choice, he notes, of selling his $25 million-a- year business to another company.

“That could result in a good owner or in a change in the way the company operates and where,” Mayer reasons. “It's not a chance I want to take.”

Similar problems would arise if he took Small Dog public, he says.

“That's a costly option and it involves fiduciary responsibility to a public that may have different ideas as to how to allocate profits.”

Small Dog, which resells Apple Macintosh computers in Vermont and on the Internet, is getting advice from the Vermont Employee Ownership Center, a consultation and advocacy organization that draws praise from several companies that have made the switch to worker control.

Mayer says he has set no deadline for acting, but expects to arrive eventually at the most appropriate choice with the help of the center and of Vermont companies that have pioneered the route. As chairman of Vermont Businesses for Social Responsibility, Mayer has extensive contacts in the field.

His main motivation, he explains, is to ensure that Small Dog doesn't wander away. Mayer says that he and his son, Hapy, established the company eight years ago partly with the aim of creating good jobs for Vermonters.

“There was the feeling that if you want a good job in Vermont, you've got to create it,” Don Mayer says.

The importance of preserving livelihoods is also what inspired Magowan to devote much of his law practice to facilitating employee-ownership deals. When fresh out of law school and working as a clerk for the Delaware State Supreme Court, Magowan says he witnessed a number of corporate takeovers that resulted in thousands of employees being put out of work.

“That's not a pleasant sight,” he says.

Employee ownership might be a means of bolstering manufacturing companies in Vermont and elsewhere in the United States against the low-wage foreign competition, Magowan suggests.

“The idea could definitely spread in that sector,” he says. “By flattening the management structure in manufacturing and creating self-management systems, workers might be willing to work for less money. That could help them compete with the plants that have sprung up in China,” he reasons.

Kevin Kelley is a freelance writer from Orwell.

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