There has always been the notion that ESOP companies outperform their industry peers, are more resilient in recessions, lay off fewer people, have more satisfied workers, lower turnover, and on and on. The research is well documented and irrefutable. But why is this the case? Is it the ESOP itself?
Transcript
Kevin:
Speaking of Benefits, this is Kevin Long. ESOPs do not improve company performance. They don’t improve employee performance either. Okay? Is that the dirty little secret about ESOPs? Have ESOP advisors and consultants been misleading you all these years by telling you that ESOPs make better companies? Not really, not the best advisors. Advisors that are putting that statement together with the fact that it takes some form of participation plus employee ownership to improve the company are giving you the right answer. Today we’re going to talk about how ESOPs can be a meaningful reason why for increasing employee engagement and company performance and why they are not the reason for it.
And finally, what can be the reason for it? We’re going to talk to a preeminent expert in this field today, Bill Fotsch, who’s been doing this forever and really has evolved the art and science of employee performance, company performance into something that he now calls economic engagement, which quite frankly takes us beyond open book management, takes us beyond things like TQM and productivity circles and all of that consultant speaking. I’m really excited to bring Bill to you and talk about what I believe really matters and what Bill has to say really resonates with me and what’s important to my clients.
Now I have to start this discussion with a disclaimer. I am not a management consultant and I don’t even play one on TV, but I want to tell you that over the last 30 years, I’ve witnessed a lot of companies that have been very successful in improving their performance, and quite a few, not so much. I will tell you what I hear all the time from companies, whether they’re starting down this road or who have an ESOP and they just don’t know how it can make a difference. I hear, “My employees don’t understand the ESOP,” or, “They don’t care about their stock value. How do I get them involved anyway?”
And then I love this one, “We have a good management system already. We pay pretty good performance bonuses.” So what do I tell them in response? Well, here’s my bottom line, three things. Number one, you need to put it on them to figure out how they can affect their performance and improve the performance of the company. It’s their responsibility. Number two, it can’t be from the top down. Now, it’s true that if you have a really good CEO who’s steeped in this employee ownership culture, in these principles of economic engagement, it’s going to go a lot better. The last thing you need is an obstruction in the C-suite. It’s just not going to happen.
Lastly, the management culture is what drives value. It’s not the ESOP, which gets us back to where we started. It’s the management culture. And I’m not going to say participation. I’m not going to say open book management and I’m not going to say participatory management, worst of all. Frankly, when I use the term participatory management, I sometimes see CEOs’ and CFOs’ skin crawl. The connotation of employees will be running the company, comes to mind, and that almost turns into an inmates will be running the asylum connotation for them. That’s quite frankly, the last thing they want to hear or see happen when they’re just going through the transition to employee ownership. Frankly, they’re very good at running their companies and they truly believe it. The proof is in the fact that they’re now looking at employee ownership because it’s only the most successful companies that can actually have an ESOP. That’s just a fact. But this transition to some form of improved culture to boost performance is a big change. Now let’s get to the best part of this podcast.
I want to turn to Bill Fotsch, who is the leading expert to my knowledge in this area of economic engagement, because quite frankly, if I’m not mistaken, he’s coined the term. He’s been in the business forever. He’s been a productivity coach. He’s been an open book management coach. He is an engineer who started out in the industry and got his MBA at Harvard and worked for Bain and Company. His background is really amazing, and what we’re going to do today is run a few questions by him and see if we can get at these distinctions and find out what really makes a difference. You’ll hear his passion when we get into it. Bill, welcome. I really appreciate you being here.
Bill:
A pleasure, Kevin.
Kevin:
Did I leave anything out of your illustrious bio? Is there something about the progression of your skillset that you want to get across to people that is important background?
Bill:
Thank you. I think you’re great. The one thing I would mention that is a continuing theme basically throughout my professional life is I’m inherently an engineer. I want to understand how things work. As I’ve evolved, it’s always been as a function of understanding better how things work. That would be the only edit I’d make.
Kevin:
Great. Well, to my knowledge, all of my clients are process driven. They have ways of running their company that they think are great and they are all looking for something better. I think that skillset is probably what has made you so successful because this whole consulting area is trying to bring theory and put it into process. Imagine that, an engineer with an MBA. I think that makes you 007 in the consulting world, Bill.
Bill:
Well, we’ll see. The other thing I wanted to highlight that you said that I think a lot of people miss is that the folks that are great leaders of companies, and if they get to an ESOP, they continue that. It’s not what they give their employees, its that they present opportunities which the employees run with. A quick analogy, one of the hundred most wealthy guys in the country is Jeff Hildebrand. He runs Hilcorp, an oil field recovery business. He does some amazing things, one of which is he allows each of the crews that run the various wells to actually buy a stake in the well. Who does stuff like that? Well, one of the hundred most wealthy individuals in the country does that. And while he’s a multi-billionaire, there is a fair number of millionaires that have resulted from that. I mention this because I think you judge a process by its results.
Kevin:
Yes.
Bill:
Great processing, great result.
Kevin:
Right and that is getting back to the thesis of it. It takes something in management. It takes empowering your employees to make a difference. But here in this podcast as we talked, we want to get down to some really key distinctions. We want to get past the vagueness, quite frankly, of what is this participation and what even makes it work. I’ve got these burning questions I have to ask you and I’m really thinking that I want to get down to it, but I hope I’m not wonking out here, but let’s get down to it. Having read so much and watched clients struggle with this and seeing some really good ones be successful in some form of management theory, what do you and what does your research lead you to call it economic engagement and not open book management or whatever?
Bill:
Let me start by saying if you Google economic engagement, it talks about how countries are able to work together, even countries that hate one another. The term is broadly used in that environment. The Abrams Accord most recently in the Middle East. Because they’re both looking to improve the economics, they tend not to shoot at one another as much. It’s sort of true in business. If people are understanding the economics, then the likelihood that they’re all pointed in the same direction is high and the economics start not from the management, not from the employees, it starts from the customer. And that’s one of the reasons I evolved from Open-Book Management to Economic Engagement, adding a focus on customers and the economics that drive the financials.
Kevin:
I routinely disseminate his publications to people. It’s just the greatest contents in the world.
Bill:
I keep trying to talk him out of retirement. I had an email exchange with him this morning where he reminded me he’s retired. But if you look at open book management, it says nothing about the customer.
Kevin:
Now, this is something that’s really, really important because one of the first things that people hear about this process is this notion of, give your employees the financial statements. And the fear question precedes that. The CEO says, “Do I have to give them the financials?” What is really out there in the marketplace is this, teach them how to read the financial statements, help them learn how to run a business. And mind you, I don’t think that that’s bad, and I’m not going to knock anybody that promotes that theory because there are some really big organizations that do a really good job and have created this movement of open book management. But as you’ve told me and as you’ve taught me, there’s something missing there, isn’t there?
Bill:
There’s sort of two points. Am I a fan of open book management versus typical management? Wow, yes. But remember, I’m the engineer. I’m looking to figure out what works and works better. And for me, the customer thing came very evident in 2008 when all of my clients are looking for customers. They’re looking for revenue. We got too much capacity. The open book stuff wasn’t much of a guide. That’s why I got very interested in Fred Reichheld’s work in that promoter score. And even that wasn’t perfect, kind of evolved. Fred Reichheld is a partner at Bain and Company. I knew him when I was a manager, a billion years ago.
If you stayed the night at a hotel, you went on a flight, and you got an email back following that that said, would you rate your experience in terms of how willing you are to refer to the company from a scale of 1 to 10? That’s net promoter score. What I found, by the way, is when you ask people the why, not the score itself, but the why, then you start understanding what they really value and it really gives you an understanding of the economics. By the way, it tends to improve repeat and referral business also a good thing.
The other aspect is sharing, just like you said, is sharing the financials with the employees, a good thing versus not? Yes, it’s a good thing. Is it the best thing to do? Typically not. When I worked with BHP Billiton, this big mining company, if I had to roll out income statements and balance sheet, they’d laugh me out of the place. And it’s not that it isn’t, some people will say, especially in smaller companies, that there’s a utility, my employees knowing and understanding income statements and balance sheets. Well, that’s a lot of heavy lifting.
Kevin:
It is. I think it’s great that you’re acknowledging the utility of that because as I understand your work, it is an evolution. It is a progression beyond that as the fundamental and that is how you do it. But I think that in taking your process and knitting it into the ownership culture and the fact that you have the stock in the ESOP, there has to be some reporting or analytical nexus. What I tell my clients, and you tell me if I’m missing something here, Bill, I tell them that what they need to allow their employees to understand is, where does what they are doing affect the financial statements and financial performance? Is that anywhere close to correct?
Bill:
That’s exactly right. But it’s also a bit complex. Let me explain what I mean. If you’re looking to teach people math, you don’t typically start with calculus. You make sure they know how to add, subtract, multiply, and divide, then maybe get to algebra, and eventually you get to calculus. Understanding what drives equity is calculus. For most folks, understanding that, I went to Harvard Business School, it’s seen as a relatively good business school. There are lots of my colleagues that don’t understand the notion of how you drive equity very well at all, much less, here’s a landscape. Here is a flight attendant. It’s not that it isn’t a good thing to do, it’s just a big stretch getting started.
So if you start with more bite sized chunks, and that’s where the economics comes into real handy because I’ll go back to BHP Billiton for a second. Understanding how they drive the income statement, boy, that’s tough. Understanding how they increase more safe tons, which fundamentally drives the economics, now you’re speaking their language. They deal with that all the time. Then as you start showing, how can you do that? What are the things you can do? I can’t tell them how to improve the throughput on the oar. But once they see, that’s the thing that really drives the economics. Then they start driving that and you show them how that is driving the economics, including some incentive they might get.
Kevin:
I think I’m saying part of what you’re saying, but maybe backwards. You’re talking about them understanding throughput is this big piece of performance, but I think to a certain extent, there’s a need for them to understand where throughput is in the financial calculation of the business. In other words, if you improve throughput, yes, there’s more tonnage, and here’s the ESOP nexus, what that does is raise profitability this way. If this department or this job function does this, then it’s going to move at this. Then you have the possibility that the different departments, divisions, and job functions, can collectively become this employee ownership driving the value machine.
Bill:
Interestingly enough, I’ll do it different. When I had the privilege of working with Southwest Airlines about 15 years ago, more recently, they’ve been having some trouble, but we were working with the pilots. The first interaction we had with them is, what do you think, there were 600 pilots, what do you think you can do to improve the financial performance in your world? What came back was two things. Pilot productivity and fuel economy. I don’t know that, Mike Van de Ven, who is the VP of Finance, who I was working with, he’s now President. He didn’t know that. Matter of fact, he actually didn’t think fuel economy would be all that important at all. And when we got that back, he said, “No, no, that’s just wrong.” It turned out, Mike was wrong. The thing I’m mentioning is, it’s not top down, it’s much more bottom up, and oftentimes the folks at the base of your organization, who are the folks speaking with the customers.
Kevin:
It’s 100% bottom up.
Bill:
Well, I’m never a 100% kind of guy because the notion of, I’ll call it asking the right question, is more of a top down aspect of this stuff. But so suffice it to say, I would agree with you in the main, it’s a bottom up. And frankly, if it’s not coming from the bottom up at all, you got nothing, which sadly is the vast majority of ESOPs.
Kevin:
Right. Now, before we get to an attempt here, to wrap this up, we’re having too much fun with this discussion. Let me go back to this comment card, employee customer survey saying, I can imagine some of the listeners are going to scratch their heads and go, “What, this is a comment card that’s driving productivity. Isn’t that a little bit simplistic?” This notion of the why on top of it, is it really that straightforward? Is there work you have to do beyond the survey and whatnot to really develop with the impact?
Bill:
Of course, there’s all this interactive nature, but part of what I would say is when I was teaching my kids tennis, I didn’t start by, here’s how you manufacture a tennis racket. I didn’t start with a classroom associated with the finer points of tennis. I got them onto the tennis court and we played. Well, that’s very much what I found works best in engaging folks and driving the economics. Interestingly enough, a really important aspect of that, which I didn’t do for 15 years, but then 2008 hit and I got a wake up call, is the right starting point is actually having the employees speak with the customers.
Kevin:
It’s actually an interface and communication with the customers, it’s not just this survey. And let me venture a guess here, because the surveys limit the value of the response and you’re not going to get to that deeper why.
Bill:
Yes and the thing that’s nice, I’ll go to the customer. What company do you know, whose fundamental purpose is not serving customers? I know of no such company.
Kevin:
Well, the U.S. government is not a company, is it?
Bill:
Well, right. Frankly, it’s serving customers profitably because it serves the customers, but if it doesn’t do it profitably, it doesn’t get to continue. That’s sort of how it works. Take my buddies in Australia that make a laminate business. They sell countertops and cabinets. They were convinced that their customers bought on price. Well, interestingly enough, when we simply asked, what is it that we do that you value the most? What we heard was on time delivery, quality, and when it’s wrong, you fix it quickly. Price didn’t hit the top five. So that shifts us to, what we got to do is make sure we’re on time, make sure that it’s flawless, and on the times when something gets out or frankly the customer screws up, we fix it quickly, and then what we can charge, source.
Kevin:
Yes and that’s phenomenal. Before my last question, once again, before my last question. Give me just a little bit about your economic engagement investors group and where you have progressed to and what you’re really trying to do with all this theory.
Bill:
Yes. Greatly summarized. I found that four past clients of mine were acquired by PE companies, but they were acquired in a very specific way. They were acquired to be the hub for an industry rollout. Well, it dawned on me, these four companies and associated with private equity firms, are doing more to advance this employee ownership culture thing, than I’ve done in 30 years. I’m selling all this crap. And it became clear to me, I got to start buying. I got to do and put my money where my mouth is.
That actually was an extension of the research that I had done that documented how this economic engagement stuff actually drives additional wealth. But if I want to change the world, and I do, because I think business is the vehicle to improve mankind’s situation, period. I’m a practicing Catholic, but honestly, I think business is a better vehicle. The point is that I can lead by example. We publish the premise, we’re publishing the research, but seven or eight years from now, I want to lay out, here’s how you make a lot of money by doing this stuff and not as an advisor, but as an investor, as an owner.
Kevin:
Great. Awesome stuff. For all of the CEOs and HR people and consultants that are listening, what do you do first? What is that next action item to actually, and to use the other management buzzword, to get some traction here. What do you do?
Bill:
My recommendation, its actually part of the process steps that we follow, is that customer interface. It’s getting input from your customers. If you’d like, Kevin, I’m sure you can get out to folks, we’ve written a lot of different articles. There’s an article specifically on this topic, an example script, all that kind of stuff. And the thing that’s very nice about that is the economics will start to come alive much more clearly as they did with my Australian buddy, but you also will increase repeat and referral revenue. It happens every time and it happens because you’re closer to your customers and you asking them what they value is not something the competition is doing. It’s a nice first step. There are other steps, but you can already get things going in a good direction by doing that.
Kevin:
Then once you have that glimmer of energy, you can build on top of that, your systems, your mechanisms, your internal processes within the workforce to really make it happen.
Bill:
It’s an ongoing kind of thing because customers can change their mind, but when you share that with your troops and say, “Okay, this is what the customers value, how can you improve that?”
Kevin:
Right, exactly. How can you make a difference and you tell us.
Bill:
Yes, precisely.
Kevin:
There you go. This has just been incredible. I’ve enjoyed it so much. Personally, it’s nice to hear that I haven’t been too far off the mark all these years. It’s really good to hear that there is a really good practical business starting point because quite frankly, people out there are lost, and I think they have to get a management book and they have to do something that they don’t understand, and this is really meaningful. I appreciate you being here and we’re going to work together in the future, I promise.
Bill:
Kevin, truly my pleasure. You’re a delight.
Kevin:
Take care, sir.
Bill:
All the best.
Kevin:
I hope you really enjoyed today’s podcast. For me, it was really rewarding and a great addition to my knowledge base to have Bill on board. I want to offer up to all the listeners that Bill’s written a book that I think is really indispensable in this area and you really need to get it and you really need to read it. It’s called, Partners on the Payroll, and should be available everywhere. Order a copy and start to make a difference. Thanks for listening.
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