August 16, 2006

Excerpts: The Company We Keep by John Abrams

By: 800-CEO-READ @ 10:30 PM – Filed under: Management & Workplace Culture

This excerpt comes from John Abrams', CEO of South Mountain Company, book The Company We Keep (now out in paperback). John talks about the value of employee democracy and getting employees involved. He walks the talk as South Mountain Co. won the 2005 Business Ethics magazines award for workplace democracy.

Adjusting the Model

I said I wouldnt concentrate on the troubles of our nations economic system, and I wont, but I need to say a little in this regard. I agree with those who believe that too many people in todays economy lack a sufficient voice or stake in decisions that affect their lives. The consequences are serious. Author William Greider is convinced that most Americans think something is wrong in the contours of their supposed prosperity. In The Soul of Capitalism, he writes:

I do not find these complaints restricted to the poor or struggling working-class, though their struggles are obviously more stark and often desperate...I have heard people from nearly every income level express an oddly similar sense of confinement, as if their lives were trapped by the good times rather than liberated. . . . Think of the paradox as enormous and without precedent in history: a fabulously wealthy nation in which plentiful abundance may also impoverish our lives.

Our wealth has come at considerable social and environmental costs. Unless we provide a greater stake in economic decision making for more people, those costs are likely to continue to increase.

In The Divine Right of Capital, Marjorie Kelly expresses the view that there are significant opportunities to make our economic system more democratic. She says this may seem daunting when we consider the power of the financial elite, but:

...we should remember that the power of kings was once as great. The very idea of monarchy once seemed eternal and divine, until a tiny band of revolutionaries in America dared to stand up and speak of equality. They created an unlikely and visionary new form of government, which today has spread around the world. And the power of kings can now be measured in a thimble.

She makes the point that democracy has been an unstoppable historical force, and that if it hasnt stopped at the doors of kings, it is not likely to stop at the door of financial aristocracy.

I was thinking along these linesalthough without the rich historical sense of Greider or Kellyas I considered my business options in 1986. I wanted the people in our company to feel prosperous and fulfilled in their work. I decided, with Steve and Pete, to investigate structures that would distribute both ownership and control. Greider compares employee ownership to homesteading. Instead of the government making land available, as in the past, he advocates low-cost capital that workers could borrow from the government to purchase equity in their companies. They would repay their debt from their share of the profits, like homesteaders earned their property by farming and ranching on the land. For us there was no need to wait for government.

This was surely a hinge point for South Mountain. For a while I was unhingedalternately frightened and excited by our deliberations. I had the power, and the greatest financial and emotional investment; therefore, I had the most to lose. Under my ownership the company had become a viable, profitable entity with a strong reputation and a backlog of work. Sometimes, during those sessions, it felt like control was slipping away, like I was tugging on the reins of a runaway horse. Then it occurred to me that perhaps I had the most to gain: aside from the lure of clearing this new path and seeing where it led, the possibility of shared responsibility and ownership promised new freedoms for me and new achievements for the company.

Our inquiries led us to the concept of a worker-owned cooperative corporation. It seemed radical but promising, especially if we could make the shift to employee ownership and control in a gradual, carefully measured way. Expressions from the participantsexcerpted from the notes of those early meetingsevoke the tone of the discourse:

Our structure should guarantee that anyone who makes a career here should be extended the privileges, responsibilities, rewards, and headaches of ownership.

The underlying premise for any change we make must be mutual respect and trust. To lose what weve created in that regard would be tragic.

We are a small, successful company with a strong reputation and track record but an informal, relaxed structure. Very little about our governance and performance systems is defined except by habit, experience, and our various quirky personalities.

Pete and Steve have put a lot into [South Mountain Company]; the restructuring should reward them without taking from John, who has led us this far, and the new structure should gradually reward others who make similar commitments.

With some trepidation, we hired Peter Pitegoff, an attorney at the Industrial Cooperatives Association, now known as the ICA Group, to advise us. I worried that hiring ICA would mean there could be no turning back. The safety and insular quality of sole proprietorship, which I had only recently earned, was about to be cast off. Engaging Peter was a semipublic announcement of intention. As a lifelong skier, I compare the feeling to summoning the nerve to drop into a steep couloir when you cant see below the crest and you know your skiing buddies are down below, waiting for you to come. With tips pointed down, I pushed off gingerly.

At a meeting in May of 1986 I expressed the view that Chris and Iwho owned and lived on the land on which the South Mountain Company premises were located at that timeneeded to retain control of the property. I was also concerned that, in the business, my customary freedom to act solo might become so constrained by shared ownership that I would no longer be comfortable there. It was the first ringing of the bell that all who make the shift from sole proprietors to employee-owners must hear. To say it another way, what if the thing weve built with painstaking care evolves into something we dont like? Its a serious risk.

Meanwhile, it was suggested at the same meeting that at the beginning John could have veto power over new owners, jobs we take, hiring and firing, and wages. I read that now and chuckle to myself, Hey, what else is there? By that arrangement I would essentially have been keeping most of the control. The idea was to spread that control widely, so the voices of all the owners had meaning. You cant steal second without taking your foot off first, and we came to agree that the only protection needed was veto power over issues directly related to the property.

At Peters suggestion we adopted a democratic ownership structure patterned after that of Mondragon, a remarkably successful network of worker-owned cooperatives in the Basque region of Spain. Mondragon has operated for nearly fifty years on the principles of employees as owners, labor controlling the enterprise and sharing the wealth, members participating in business management and decision making, a limited ratio between top and bottom pay, and education as the key to career development and progress. We made adjustments to this model to fit our own idiosyncratic needs as an organization converting to, rather than starting with, employee ownership. Particularly important was the institution of a lengthy five-year trial period before ownership for employees. This ensured a gradual transition, allowed time to measure commitment and suitability before people became owners, and provided room for training and building understanding before employees were thrust into policy decision-making. We established an ownership buy-in fee. We decided that this needed to be significant but affordable. If it was too steep it would discourage participation, so we set it at the price of a good used car, an expense everyone seems to be able to manage when necessary. The fee has increased slowly; at this point its an uncommonly good investment for new owners and its still equivalent to the price of a good used car.

Peter established a method for valuing and buying out my interest, drafted a set of bylaws, and developed a legal agenda for reorganization that laid out the process coherently.

Restructuring South Mountain Company

On January 1, 1987, I transferred the ownership of South Mountain Company to a new worker-owned cooperative corporation. Steve, Pete, and I were the original three owners. Our jobs didnt changeI remained the general manager and Steve and Pete remained foremenbut in our new roles as employee-owners, our responsibilities did. My compensation for selling the company was in the form of preferred shares, which were converted to cash over a period of five years, and a full ownership share (a more detailed explanation of the mechanics of our structure can be found in appendix 1). The first meeting of the board of directors of the newly reorganized company convened on January 9, 1987. Attending were Steve, Pete, Peter Rodegast (soon to be the fourth owner), and myself. There were seven other employees at the time of the restructuring and they were all on a track toward ownership. This was a critical transformation in the life of the company, the setting of that first cornerstone of our developing business model. The full implications of what we were doing were not yet clear to us.

In 1989 Peter Rodegast became our fourth owner. Peter had been hired in 1983. He had studied architecture and had experience in both building and design. Over the years his presence in the design studio had become indispensable and he no longer was able to fit in much carpentry, but to this day, when asked at annual evaluations if hed like anything about his job to change, one of his refrains is Well, I wouldnt mind pounding some nails at the job site. Mike Drezner, a former teacher turned carpenter who was a bit older than the rest of us, was next in line, becoming an employee-owner in 1990. But all was not peaches and cream.

Within two years of the restructuring Steveone of the original inspirations for itleft the company. He was an effective owner, but he was involved in many causes. Each was more worthy than the next, but at the time he wasnt able to balance them (and new parenthood for good measure) with his responsibilities within the company. The distractions caused a crisis on the job. Due to his longevity and take-charge approach, he was one of our foremen, but his projects were suffering and the people on his crew began to complain. We anguished together and decided, with his concurrence, that hed be better off trying something else. His departure was disheartening and difficult, but amicable and successful. We owe Steve tremendous gratitude for his important contributions to the early days of South Mountain. After he left, he and a partner founded a landscaping company, a design/build company much like our own. That company, Indigo Farm, has become a kind of sister company, doing most of our site planning, landscape design, and landscape construction for the past several decades. Eventually they, too, converted to cooperative ownership. They continue to thrive, and we continue to collaborate, although Steve is now engaged in other work (most recently helping to rebuild a temple in Mongolia!).

Our sixth owner was Vicki Romanauskas, our office manager, who signed on in 1991. In 1995 she became the second owner to leave. She left under very different circumstances; her departure was simply a time to celebrate her decade of employment, the contributions she had made, and her upcoming marriage, which was pulling her away from the Vineyard. During her four and a half years of ownership she had accumulated sufficient equity that she would depart with a significant nest egg.

In the decade since, no owner has left. In that time we have gained twelve new owners for a current total of sixteen. Several more will soon qualify. Incorporating new members has worked well; all take the responsibility seriously and quickly become contributors. When we hire someone new, we assume that they will become an owner in five years. This makes us think differently about who we are hiring and why. The selection of new employees is as important as the structure. The five years is, in effect, a trial period. During that time our personnel committee clarifies, before each individual reaches eligibility, whether the employee wishes to accept the responsibility and whether the current owners wish to accept this person as a partner. An employee who makes it through five years without extenuating circumstances is likely to become an owner.

But ownership is not a requirement. Neither is it a right. It is a privilege to be enjoyed by those for whom it is appropriate and desirable. Some have remained here, working full time, as long as ten years without becoming owners, but this is rare. Ownership just isnt for them, or so they think; some of us argue differently and encourage them to join. We have noticed that since employee ownership is an integral part of the company culture, those who remain nonowners for a long time are, in subtle ways, isolated from important internal dynamics of the company, along with missing out on the opportunity to build valuable equity.

Prospective owners are expected to have three principal criteria: an understanding and intent that employment at South Mountain will be their primary work for the foreseeable future; a demonstrated ability, from the evaluation process, to work effectively and cooperatively; and a commitment to understanding and honoring the companys core values of quality work, ethical business conduct, environmental responsibility, and concern for othersin short, we expect that a new owner will be a good representative of the company.

The employee-owners are the board of directors of the company and they make all policy decisions. Only employees may serve on the board. Ownership is inextricably tied to employment; upon termination of employment or retirement, an owners share must be sold back to the corporation. Although we get plenty of advice from accountants, attorneys, bankers, and consultantsthe best ones we can findand we have the utmost respect for them and listen carefully to their counsel, they do not make decisions about the company; only employee-owners do.

The key distinction that requires constant examination is the difference between ownership and management. The board sets policy. Management carries it out. The board has responsibility for issues that affect the future of the company, such as accepting new owners; significant personnel issues; compensation and benefits policies; profit sharing; general direction in terms of future projects and work; major purchases, investments, and expansions; company growth; new ventures; involvement in community projects; and major donations of time and money. It is not always clear whether a decision should be made by management or brought to the board. We are continually testing these boundaries and refining our process. Informal adjustments and new understandings are crafted over time.

All decisions of the board of directors are made by consensus, but there is a backup voting mechanism for those rare instances when we are unable to reach consensus (see appendix 2, Meeting Facilitation and Consensus Decision Making). Each owner has one vote. In eighteen years we have only had to vote three times. The first time we voted, many years ago, was over a trivial matter that provoked strong disagreement. We couldnt reach consensus, and finally someone said, Were spending far more time on this than its worthlets take a vote. Without resolving our disagreement we voted and moved on. Easy enough. The second and third votes were about substantive questions; the dialogues were rife with conflicting views and debate. On each occasion we had several long meetings before determining that we could not reach consensus. The ensuing votes were not close, however, and there was no discernible rancor in the aftermath because the airing had been so complete. We have found the backup voting provision to be essential to the effective use of consensus decision making.

Everyone accepts the importance of balancing participation and efficiency. We know that since there is no map to guide us, we need to be comfortable with trial and error and nimble enough to alter the process as needed. Roy Morrisons title for his book about the Mondragon cooperatives in Spain, We Build the Road as We Travel, is an apt description of our ownership and management systems. We, too, are building the road as we travel.

Excerpt from The Company We Keep by John Abrams (pp. 30-37). Chelsea Green Publishing, 2005