It’s employee ownership month. But, most people have never “met” an ESOP company. There is no better way to appreciate the ESOP phenomenon than encountering one firsthand. Whether you are an advisor, company owner, executive, or employee, you will enjoy listening to the journey of a company that has been ESOP-owned since 1980.
Transcript
Kevin:
Speaking of benefits, this is Kevin Long. Whether you’re an advisor to middle-market companies or whether you are running a middle-market company, if you’re talking about ESOPs, you know firsthand that ESOPs are really obscure. There are not a lot of them out there and they’re surrounded by myth and rumors and innuendo. Like, why aren’t there more ESOPs? Don’t ESOPs kill companies? Do ESOPs really help companies? What really are the tax benefits of ESOPs? Our experience at the firm is that there’s no better way to understand what ESOPs are or what the ESOP experience is for a company or selling shareholder than to actually interact with one, whether it’s to advise one or to be working at one.
This podcast is to introduce everyone to a company that’s been a client of mine for 30 years as of the year 2022, which is really kind of mind-boggling. I literally was in a conference call with my client last week and the Chairman of the Board and I looked at each other on the video and at the same time had that realization. It’s been 30 years, so hence the idea for the podcast. Today I want to introduce you to Dave Baker, the outgoing CEO and the Chairman of the Board of RobbJack Corporation in Lincoln, California.
Dave:
Thank you, Kevin.
Kevin:
I don’t want this to be a Q&A podcast interview, Dave. I want this to be an organic, let’s catch up because it’s been a long time since we’ve actually sat down and just talked the talk. We can do a bit of reminiscing and not just for our podcast audience, but for your folks at RobbJack as well. It’s helpful to get some of this down on tape, as we would say a hundred years ago, so they can hear a bit of the RobbJack story. How does that sound?
Dave:
Sounds great.
Kevin:
As we were talking before the call, let’s talk a little bit about RobbJack. Give me the epic story of RobbJack and you leading the company.
Dave:
RobbJack was founded as an industrial distributor by Bob Eitreim and Jack Peterson, hence the name, in 1960 in Mountain View, California, what was to become Silicon Valley a couple of decades later. Shortly after they started distribution, which involves buying and reselling industrial goods to companies like Lockheed, Sunnyvale, FMC in San Jose, and machine shops throughout the South Bay. Not too long after they got going on that, they ran into a small company that was going out of business that had equipment for regrinding cutting tools, which none of them had ever done. But, they bought the equipment anyway and got started on that. Within a few years, they had actually figured out how to resharpen cutting tools and decided that, and these are Bob’s words, the end mills, the router bits as you would think of them then, the drill bits that Kevin calls them, that they were selling at the time were “crap.” Exactly the way Bob put it.
They decided we should start making our own. That would’ve been in 1969. So, they hired a cutting tool engineer from Lockheed who came over and helped them put that line together. The company struggled through the seventies doing that. There were other profitable items that allowed them to make the end mills and router bits. At the end of the seventies, a Japanese company approached us and offered to sell us proprietary equipment that changed all of that. Suddenly, we were growing like crazy because we added to our product lines and efficiencies. They were computer-controlled equipment, which didn’t exist before that, and they were multi-operational. So, that made a big deal.
By the end of the seventies, and this is per Bob, he felt like we had a core of younger people who might be able to keep the company going when Bob and Jack retired. That’s where the ESOP came in. Bob was very tech-savvy and very financially savvy. So, I’m sure it was on his mind as well. But, the way he told us about it is, “This is to provide you with a vehicle to do this if you’re capable,” which is pretty cool.
Kevin:
What’s interesting about that, Dave, I mean from an ESOP nerd’s perspective, is that it was before the big, what I would call the ESOP land rush, which started in 1984 when Ronald Reagan turbo-charged the tax code with the tax-deferred rollover and all of those things.
Dave:
I don’t recall how he ended up getting introduced to the firm that put the ESOP in place for us, but Bob was always pretty foresightful. He was always good at that. The ESOP was one of the reasons that we ended up moving up here. Bob did a really good job of trying to convince us that the ESOP was for us. And as you well know, that’s really hard, especially when you’re 25 or 35 and retirement is the very last thing on your mind. Bob did a really good job of pressing upon us that we were all in this together and the better we performed, the better off we’d be in the future. He made kind of a big deal out of it.
Kevin:
So, you made a big migration out of the Bay Area?
Dave:
Yes. As I told you, we were growing nicely through the early eighties. There was a sort of California recession when all the defense companies moved out of there in about ’86. By ’89, we had outgrown that building that Bob had in Mountain View. In the process of looking for another building, Steve Handdrop, the office manager, and I approached Bob and Jack and said, “What would you think of looking for an outlying area where the employees can afford to buy homes?” Bob’s response was typical Bob, “That’s perfect, David. That’s a great idea, but nobody’s going to leave the Bay Area.” In October of 1990, we moved 46 of 48 employees to Lincoln in Placer County.
Kevin:
Everybody got in the covered wagons and moved out to the Great Prairie and the rest is history, right Dave?
Dave:
Something like that. Actually, that was one of the company’s great success stories. We shut off the power to the machinery in Mountain View on a Tuesday evening and we cranked it back up again on Monday morning in Lincoln.
Kevin:
What amazes me about that story is that it’s archetypal to what should happen at an ESOP company where the ideas are coming up from the employees for the betterment of the company. That’s just huge.
Dave:
Well, and for the betterment of the employees too. Connie and I counted this not too long ago. We think we had 26 first-time homeowners when we moved up here, out of those 46 people, which is a pretty big deal. They couldn’t afford to buy a home in the Bay Area.
Kevin:
No. A lot of people don’t recall that the eighties were as bad as the 2000s. I mean, the Bay Area was going through immense growth pressure and people complained about the cost of housing there. I fled the financial district of San Francisco in ’87 as well. So, that’s the way it goes.
Dave:
Right.
Kevin:
Bob was really promoting the ESOP. Was he doing it through trade associations or was he just doing it with his own hutzpah?
Dave:
He just did it himself. He wasn’t involved in many trade associations. We were in the industrial ones, of course, but as far as ESOPs go, I had never been to an ESOP meeting before I took over years later. During that time when Bob was doing that, he suggested that it was time to do something different. In 1992, Bob approached Steve and me and said, “Steve, you’re the Executive Vice President. David, you’re the President. I’m going to give you one year to the day to find a bank dumb enough to lend you the money to buy me out.” And it was like, “Okay.” Again, typical Bob.
Kevin:
Incredible. So, you hoodwinked a lender, you got a bunch of money, and you did your first transactions. It wasn’t a complete buyout.
Dave:
No, we bought Bob out completely. Jack had passed away by then. We bought his estate out right about the same time. That was in 1992-ish. By 1999, we were a 100% employee-owned ESOP because we paid the bank back.
Kevin:
We started working with you in ’92, so it was pretty close in time to all that getting done. On the notion of Bob chasing everybody about the ESOP and weaving it into the company culture, do you think the employees really got on board rapidly? As you went down the road and you were hiring new people, is ESOP something that they all kept in mind in terms of, wow, we’re an employee-owned company and it was part of the culture?
Dave:
No, it didn’t happen fast at all. There were a few of us that understood and appreciated it. ESOPs have a lot of positives as far as I’m concerned, and I’d do it all over again if I got to. But, there were also some negatives. I can distinctly remember the meeting where Bob introduced the ESOP to the employees and questions arose such as, “Well, since I own stock now, am I my own manager?” And of course, the answer is, “No. When you own IBM stock, you’re not a manager there either.” Others were saying, “Okay, well since we’re all owners now, are we going to split the profits at the end of every year?” “No.”
We went through those growing pains for a long time. You get some people that push that more and do it better. You know Connie Pool. Connie has been an advocate and a champion basically since we put the thing in place. She was really helpful at it too. I’ll even admit that I was only 40 at the time and I wasn’t thinking a lot about retirement. I was thinking about working. Over time, it helps and we continue to push that mindset that, if you’re sitting on your rear and not doing your job, the way Bob put it was, “you’re eating my lunch.” That was the way he put it to us. Right now I’d say the culture over there is pretty ESOP-ish.
Kevin:
Looking back, I think Bob could have taught at the Harvard Business School for how advanced he was.
Dave:
I totally agree. Bob was a very sophisticated guy business-wise and also a great mentor and friend.
Kevin:
That’s a common theme with all of our ESOP companies. We’re really blessed to have nothing but great clients like you and RobbJack. People ask me why there aren’t more ESOPs and my answer is no longer, “Well, they’re complicated or the advisors don’t understand them.” My answer now is it takes a really good company with a really enlightened owner that has the foresight and the management theory that they’re living at the company to make it work. Perhaps the growth is not entirely attributable to the ESOP, but it’s attributable to how well you run that company.
Dave:
Possibly. Again, a large part of what happened there is Bob having the foresight, and I’m not even sure where he learned about ESOPs. But, having the foresight to look at that and say, “Here’s a potential vehicle that these people that don’t have two nickels to rub together can possibly use to continue the company on without me into the future.” Not only did he have the foresight to do it, but it also happened.
Kevin:
Now you’re on the threshold of something that I think is really wonderful and rare in the ESOP world, and that is you’re transitioning to third-generation management. It went from Bob and Jack to you, Steve, and Connie. Now you’re moving on to a new president and changes in the governance structure. Why don’t you tell us about that process and what you’ve gone through there?
Dave:
I had decided that I was going to retire when I did a year ago. Three or four years before that, I wasn’t exactly sure how, but that was my goal. During those last five years, regularly, I would say, once or twice a year, ask the staff group, which included Mike MacArthur that’s now president, and Connie, Khadidja, and the upper managers. I would ask them, “What do you want me to do? Because I’m planning on retiring at some point. Do you want me to try to sell the company? I can almost certainly get you more for your ESOP stock by doing that. Or do you want to try to keep it going?” It was unanimous every time, “We want to keep it going.”
At some point, I decided that it was my duty to at least make that attempt. We put out a notice internally and said, “If you’re interested, give me a resume and prepare to be interviewed.” We also did it externally on LinkedIn and Vistage, which is a CEO organization. We got quite a few candidates. We got two internally and we had like 15 externally. And of the 15, we agreed to phone interview eight. And from that, we narrowed it down to two outsiders and two insiders. We said, “You’re getting face-to-face interviews.” It was a really tough decision because both of the outsiders were pretty heavy hitters. They were pretty good. The two insiders also had some experience.
We went with Mike, the insider, based on his knowledge of our business, which is I think one of my strengths way back when I took over. I didn’t have all the business knowledge and the management knowledge, but I knew our business and Mike knows our business. I’ll tell you as of today, it was a good decision. Sales are up. Morale is very good. I’m there regularly. They’re my friends and my family. He’s got good ideas for moving forward. Mike is technical enough that he’s identified equipment that in some cases has made us 200% more efficient than we were before. He’s doing a really good job and so far, it’s working out.
Kevin:
Once again, another masterclass in management and in corporate succession. There are so many companies out there that really struggle with that. And in the context of being an ESOP-owned company, it’s congratulations on that kind of success. So, Dave, we’ve talked about the great success story and just how well things have gone. But, everyone’s going to ask “Yeah, but what’s wrong here?” Is there anything about the ESOP that you really didn’t like or that you regret or that just drove you crazy?
Dave:
No, not really. I was happy being an ESOP president as opposed to being the owner. It’s worked out fine. Again, as I told you earlier, you get some odd questions and inquiries from employees that don’t really understand what it is, but that’s not a big deal. Sometimes you feel a little bit like your hands are tied because you have to make sure that your business decisions are also for the benefit of the shareholders. Almost never is that a problem. It just never came up. Anything we were going to do that was going to be good for the business was going to be good for the employees. I hear that and I’ve sensed it, but I’ve never really experienced it personally. So no, I don’t have anything negative to say about an ESOP.
Kevin:
That’s great. With all the complexity, rules, and regulators, you survived all that. Is there anything that you would rather have not had to deal with?
Dave:
No. Like I said, even that one was hilarious. Then, of course, there’s the other side, which is another benefit of the ESOP, and that is tax avoidance. We haven’t paid federal income tax for a long time.
Kevin:
It’s kind of a 33% working capital advantage, isn’t it, Dave?
Dave:
Something like that. Yes, it’s a big deal.
Kevin:
All going to a good cause is paying for your employees’ retirement.
Dave:
Well, we’ve had two more retire this year.
Kevin:
And you’ve never had a problem paying benefits, have you?
Dave:
No.
Kevin:
Of course, you did a really good job of managing that. You had the foresight to do the projections and do the work and build it into your corporate finance model as a cost of pension basically, a cost of retirement benefits, and it’s worked for you.
Dave:
Yes. Again, as you said before, having good people is a big part of that. We’ve had good people in our finance department that have helped us for a long time and that paid attention to that. Connie’s talented enough. She started 10 or 15 years ago doing her own repurchased liability studies. And that probably is something that I would suggest everybody that’s going to get into an ESOP learn about.
Kevin:
Dave, I really appreciate you taking the time and it’s been great to go back over this with you. Do you think we’ll be working together another 30 years considering you’re only 40 years old?
Dave:
For your sake, I hope not.
Kevin:
Dave, we’ll talk to you soon. You take care.
Dave:
Kevin, thank you.
Kevin:
This podcast is for general informational purposes only. It does not create an attorney-client relationship between Employee Benefits Law Group and the listener or reader, and does not constitute legal advice for a specific situation.
