.png)
Episode with guests: Tom DeSimone, Hillary Hughes, Rich Armstrong
Prairie Capital Advisors and The Great Game of Business
(This episode was recorded in December of 2021.)
Key Episode Take-Aways:
1. Taking responsibility for the success and results of the business is a simple way to describe ownership mentality. (click to jump to this topic below) It's more about that psychic ownership. The best way, I guess, or the simplest way to describe ownership mentality from our perspective is really taking responsibility for the success and the results of the business. That's really what it's about.
2. Great Game is a lot about involving your employees and getting people to take the communication, education and doing something with it. (click to jump to this topic below) We really believe that it's more of a process and ongoing involvement of your employees in the business. And so I think that is an area that can really get people to take that communication, education and do something with it. And that's what Great Game is a lot about—helping people to build this as a process of education, communication, and involvement, but getting people to act on that information to improve the business. So going back to just the simple idea of teaching people financials, we often talk about informal and formal training.
3. Driving ownership mentality begins with leadership. (click to jump to this topic below) Well, I think it begins with leadership. I think they got to model the way they have to show every single day that they believe it's important, and that they are willing to take the time to communicate and educate everyone in the organization about the business. So it starts there. And where leadership can find the time to do that is it goes back to the idea that building is a process, right, building is just this is the way we're running our business.
Continue scrolling to read the full episode transcription.
Announcer 00:00
Welcome to the "Change The Game" Podcast. Where we share stories of open-book management and highlight capitalism at its best. Thank you for tuning in to this episode of the change the game podcast. In this episode, Tom DeSimone and Hillary Hughes from Prairie Capital Advisors interview our very own Rich Armstrong on what is an ownership mentality? Is it created or taught? And what is the difference between an ESOP, private, and public company? Prairie Capital Advisors is the sponsor of the Change the Game Podcast, and you can learn more about them at prairiecap.com. That's prairiecap.com
Hillary Hughes 01:14
Good afternoon and thank you for joining us. My name is Hillary Hughes, and I will be the moderator today. I've had the opportunity to work with ESOP companies and participate in the ESOP industry for over the past 15 years, from ESOP creation to annual valuation, as well as helping through challenging and unique ESOP issues. Joining me today ... I'll let my co-panelists introduce themselves.
Tom DeSimone 01:43
Thanks, Hillary. Hello, everybody. I am Tom De Simone. I'm a director at Prairie. I work in our ESOP advisory group. And I spent about 10 years helping business owners transition themselves and their company's ESOPs, as well as advising boards of directors on mature ESOP and ESOP sustainability. I'm a CPA by background and spent a handful of years in corporate accounting before joining Prairie. I really enjoyed the numbers and the transparency around numbers, which I know we're going to get into a lot today.
Rich Armstrong 02:16
Hi! Thanks, Tom, Hillary. My name is Rich Armstrong, and I'm the president of The Great Game of Business. The Great Game of Business is a consulting and training organization. We focus primarily around this topic of building ownership culture, with the practices of open-book management, business literacy, to help people understand how the business works. What makes us a little bit unique from most consulting and training companies, were wholly owned by SRC holdings, which is a large 1900 employee-owned company ... has been for more than 36 years now. I think we're in the top 100 of the largest broad-based ownership ESOP companies in the country. So a lot of the things that I'll share today are things, certainly, that we've tried to prove out in our own company.
Hillary Hughes 03:07
Thanks, Rich. So just a little bit, by way of background for Prairie Capital Advisors. So we've just celebrated 25 years in ownership transition advisory, as well as valuation. So core business practices for us would be traditional investment banking ESOP advisory, which we're going to discuss today, as well as valuation for gifting estate and financial reporting. So we're just over 50 employees, substantially smaller than SRC. But 10 years ago, our founders started our ESOP journey. And so today, our ESOP owns just over 60% of Prairie, so we're sharing that journey with you. Today, before we get in, Rich, why don't you give just a little bit more background about the Great Game?
Rich Armstrong 03:56
Sure. You know, again, I mentioned earlier that we're a training consulting company. We try to provide different services to help people implement this particular operating system in their companies. Everything from, you know, webinars to workshops, but most of our business, the primary driver of our business is working directly with companies with our coaching network to help them implement these ideas. The original idea of The Great Game of Business was provided from our CEO, Jack Stack, back in 1992. He published a book called The Great Game of Business that really chronicled the turnaround we made from buying our company from International Harvester and how we used a lot of these practices to really connect people in the business, get them to take ownership and the results of the business and then later, you know, provided an employee ownership, ESOP, for all the employees as a reward for all the success that they've driven. Again, well, 28 years in training and coaching with Great Game. I don't know if we may want to talk a little bit about this. Now, I talk a lot around this, I think, with some of the information we'll share with you today. But our system is really based around some principles of getting people to think and act and feel like owners of the business. And I'm going to share that that's really been, you know, the success we've had with SRC. I mean the companies we work with is making this more of a system rather than an event ... in really getting people to understand how they can continuously learn how the business works, to begin to think like an owner and empower them to make better decisions - they act like owners. But then ultimately, with an ESOP and employee ownership, you can provide them a pretty significant stake in the outcome, which is the equity in the business, which is pretty powerful.
Hillary Hughes 06:06
Great, I really appreciate the overview. And I would just encourage our listeners, if they have not heard Jack's story, of buying SRC out of International Harvester; it's a story that you should make time to hear. And really the genesis of those principles, and I appreciate your sharing those, Rich, because as we kind of go through our discussion, it really centers around unleashing this ownership mentality. And we hear it a lot within the ESOP industry. Certainly, this desire for employees to think like owners and make decisions that owners would make ... really having that personal, vested interest in having a good outcome for each decision they make every day. So we'll walk through this today. I appreciate you sharing that with us. And I'm sure we'll continue to touch back on it. So for talking about ownership mentality. It's something that I think we, within the ESOP community, think is pretty unique. But maybe Rich will share with us a different view of that. But first wanted to see ... Tom really get your take that seeing as all employees, eligible employees within the ESOP are beneficial owners have either all or a portion of the company that's sponsoring the ESOP. Tom, why, in your opinion, hasn't this translated into thinking like an owner?
Tom DeSimone 07:41
You know, it's a, it seems like a straightforward and logical endpoint to your question. For an ESOP to work, this culture is built in a way, that mentality is there. But it's, you know, Hillary takes a lot of work, there is connections that are happening throughout the daily business, that has to be occurring for everyone to think and feel like owners. And I want to pause there on the word feel, you know, when you don't, when you don't feel like an owner, even if you say you are or you're a beneficial owner, if you don't feel that you have that ownership, or you have that stake in the outcome, it's very hard to get the behaviors to move the direction that you want them to move. And take that a step further, it's very hard to get employees to connect those same behaviors to value to them, which is really value to the company. But if you're putting yourself in the beneficial owner position, connect those behaviors, what I do on a daily basis at our business, how is that benefiting me? And to connect the dots is very difficult. And it takes a lot of work. I think later; we might talk about what other companies might be doing in the ESOP. An ESOP structure, or other ways that Rich has seen his clients build that ownership mind and that ownership culture because a lot of it has to do around that feeling. And then next would be how do we connect, again, connect those behaviors to really that stake in the outcome that Rich mentioned earlier? So, Hillary, I think it's that lack of connection really is the main driver behind why that just doesn't catapult us right into that ownership mix. But with a little bit of time with a little bit of understanding, and for sure, some training, I think we can all get there.
Hillary Hughes 09:31
So, you know, just talking about that, with an ESOP, there are a lot of terms that are used in terms of ownership culture, an Ownership mindset. I think that was one you mentioned, Tom, so we have ownership mentality here. Rich, I think it would be helpful if you could define and describe ownership mentality. And is this based at all on how the company is owned? Say, is this unique to ESOP refers another company like another private company or even a public company.
Rich Armstrong 10:07
I think the way that we look at it; it certainly is not about equity ownership.
1. Taking responsibility for the success and results of the business is a simple way to describe ownership mentality.
It's more about that psychic ownership. The best way, I guess, or the simplest way to describe ownership mentality from our perspective is really taking responsibility for the success and the results of the business. That's really what it's about. But how do you go about doing that? When I first got involved with the employee ownership community, I, you know, I met a lot of CEOs that had made transitions to an ESOP. Right. But they were very frustrated because a lot of their people weren't appreciating what was given to them. Right. And they weren't taking ownership. And it was hard for me to make the connection because, at SRC, I think we've always naturally done this. We made sure people understood what ownership meant and what we were really expecting from our employees. I think what I see with an employee ownership community is that there's this transition that happens, there's this progression. I guess, from kind of a company of owners, then you provide him equity through, let's say, an ESOP, and they in effect become shareholders. And what I mean by that is that they, you know, it's thinking like your own personal investments in a stock market or publicly traded companies, right? You know, as a shareholder, do you really feel accountable for their results, right? You're really looking at that company that you invested in to get the results, right. Sometimes we're not even obligated to buy their products. But when, in what happens that can be very dangerous because basically, you're expecting the management to take ownership responsibility for the results. What we want to do is try to progress that to that Ownership mindset of that ownership mentality, where people are saying, I am taking ownership with this, I'm not pointing at management to help improve the value of the company. I'm responsible for helping to build the value in the company. And that's really what ownership mentality is to us.
Hillary Hughes 12:15
So Rich, essentially, with that ownership mentality. You're saying it does not really matter if the employees have an equity stake in the business. So maybe talk about the companies you've worked with. I mean, are these typically employee-owned? Are they privately held? I mean, within the ESOP industry, we see this linkage is really strong. But what I hear it's more really what's been taught in how you're creating that linkage?
Rich Armstrong 12:46
Yeah, I think it really isn't. It's kind of from our own experience, right? We were an employee-owned company. So obviously, we looked at it as getting equity is a big part of that, that they know that they have a stake, a real stake in the outcome or a stake in the outcome for the business, right. But 85% of the business that we actually work with, to create ownership culture, and to get people to understand the business, are not in a position or haven't provided equity. But they're still getting that ownership mentality out of their employees. They're engaged in the business. So what I look at is it's kind of the process. Equity is kind of the reward for that ownership, right, taking that ownership. And I think you can build those same types of psychic ownership in a company, even without equity. But putting an ESOP on top of that can be extremely powerful. So it's making those connections. It goes back a little bit to about, you know, where we've seen those the strongest people and most successful, ESOPs, from our perspective, have been companies that have spent 2, 3, 5 years creating that ownership mentality, then they go and transition to an ESOP. And people appreciate what has been given to them. And they immediately know what they can do to make a difference in that. So you're not backtracking on that doesn't mean that is always the way you have to approach it. But I think that it starts with the idea that we have to quickly create that Ownership mindset if you really want to get the full results and benefits from an employee-owned company.
Hillary Hughes 14:29
I really appreciate that perspective. I don't know that's one that I had known before, just in terms of how many companies did not have that equity linkage. So talking about the ownership mentality, you know, you've really emphasized it being taught. Where does culture come into play? Do you need to work on your culture first, or is it teaching this ownership mentality? Are we talking about the same thing or different?
Rich Armstrong 15:03
I think we're really talking about the same thing. I mean, the culture is the ownership mentality. And that's why we sometimes use the phrase ownership culture. With a lot of things that we do with companies, and what we do within SRC is that we're really focused on getting people involved in the business. I know I had a mentor of mine with SRC for years that said, "Look, if you want your people to think and act and feel like owners, you have to first treat them like owners, give them responsibility, and trust them, respect them. Understand that they probably are capable of understanding all the complexities of ownership and business, but they just need to be taught. And that's the foundation." And I think that that culture of understanding the business and understanding what I can do each and every day to influence the results of the business creates the culture you really are wanting to have anyway, right? Especially an employee-owned company, because you want people always thinking about what they can do to improve the value of the company, and, you know, create their own personal success going forward.
Tom DeSimone 16:21
You know, Hillary, the National Center for Employee Ownership, came out several years ago was the study and part of that study, put employee ownership into three buckets of philosophies. Ownership was, "I'm an owner, and I'm going to act like an owner, and be an owner," just as Rich is describing, and "I have a clear line of connection to the stake in the outcome". The second one was, "I don't really care. You’re telling me I'm an owner, but it doesn't really mean much to me, I don't see the end game, it's not really going to do much for me, I'm just here to collect a paycheck type mentality." And then the third is ownership mentality, or the ownership mind is a social construct. And it's really based on the idea that if the culture is there, there's a peer-to-peer relationship that sort of moves the entirety of the firm in this ownership mind. You know, people might say, "I don't really care," but then one, really the only one not caring in the office, and everybody else is doing it. You either weed those people out, or they get on board, generally speaking. So, I like to think that ownership mentality is both a part of culture, as well as being taught, there's lots of things that need to be taught and just think about financial literacy, for example, understanding financial statements, you know, that you don't get that generally, just from being around. Is someone teaching it to you and mentoring you about it? But the culture itself is the intangible part of ownership mentality, and I think the culture itself propels it forward.
Hillary Hughes 18:06
Great points. So do you think this is something that comes more easily to certain employees or generations of employees and thinking about, you know, at certain points? I'm very concerned about my engagement of millennials or different generational segments. Do you see any generational differences, or maybe in groups of employees, who seem to more easily or come on board quicker with this ownership mentality?
Rich Armstrong 18:42
I can start Tom, and, you know, from my perspective, and what I've actually seen, I don't see a lot of difference. I think it's the same kind of thinking behind really getting them to feel like they're part of something they belong to. Something, you know, and that they can influence the results, and they're empowered to influence those results. So I don't see that. I think that there's some challenges, obviously with ESOPs and, you know, age levels, you know, of people appreciating that longer-term benefit and those kinds of things. And that's, you know, something that you're always going to have some challenges with. But that's why you can revert back to the idea that let's just get people to, you know, think and act like owners first, and then they're going to, you know, they're going to be engaged from that because I definitely see them being more engaged because of that. But the rewards will come, you know, and the rewards are there, and they'll appreciate those rewards even more when they feel like they actually influence those results.
Tom DeSimone 19:54
Rich, I think something you said earlier was really important to this topic here. And it's about trust. You know until you treat someone like they're an owner and give them the trust or trust in them, it's very hard to build these connections in the culture. A quick story, we worked with the company several years ago, and this company made table skirtings. So when you went to the hotel and you had a conference, there's a table skirt around the tables, the booths and things like that. And that was their company. They made table skirts. And coming out of the Great Recession, the table skirtings changed. Instead of looking like curtains, they were tight wrap. They're almost like a marketing platform. And the company we were working with really didn't adopt that style. They were stuck back in the old curtain-type format. And the business was suffering. And they never really built that ownership culture. Even though they are an ESOP company, they just struggled to get the interaction. And part of it was the majority of their workforce were very transient. Many of them came from Mexico, and they would go back over the border during Christmas time or holiday time. It is just very hard to keep connections. So they didn't spend too much time on the ownership culture itself. But what they did when they were facing bankruptcy, they said, "Well, we have no other choice. We're going to open this up with foreign groups, seven different groups of employees, maybe about 10 in each group." And they said, "Let's have the employees come up with an idea that will revolutionize our product." And for the last two years that the executives have been trying to do this, and they're failing. Within a couple of weeks, they came up with an idea. And they said, "Well, look, we can manufacture this idea, and it does something for us, we'll share the profits with you." Sure enough, they came up with a great idea. They made a lot of money on it. The company didn't have to go bankrupt. They then sold out to a bigger company as a windfall for the ESOP. So it ended up being a great story in the end. And it all came from a subset of employees that at first, the executives like they're not, they're never going to get in the ownership mind because they're transient, they had different priorities. But all it took was a little bit of trust. And it turned out to be a huge game-changer for the ESOP. So whenever I think about this employee culture and the trust comment, I go back to that company, and you can really see the power of trust.
Hillary Hughes 22:21
And it seems like it also started with just the transparency of where the company was at. I mean, who knows how long they had that idea, but they didn't maybe feel the need to speak up or what we're not aware of the critical situation the company was in. So, Tom, you've worked with a wide range of ESOP companies. So how do you typically see ESOP ownership education?
Tom DeSimone 22:46
You know, it really runs the mill, you see at ESOP education and ownership education going from very minimal to, you know, the best of the best and how they're all in on educating. But I think, you know, it comes down to how are we best to reach our employee base, is it through committee visit through perhaps it's one or two individuals that are, they might be called the liaison, they're connecting the employee base to management. I think the theme, though, is there needs to be transparency from the executive or board level, to think not just about strategy of the organization, but then it's the direction of the company, and the financial wherewithal of the company and all that information is being bundled and delivered throughout the rest of the organization. You can have these staff committees that teach about the ESOP. Here's what the ESOP does. Here's how our ESOP works. But it's much more than that; if you really want to build a culture, you have to be able to connect the minds of all the employees to the minds of the people setting strategy. It all comes down to transparency. Rich and I have talked about this in the past, the need for transparency, and how important it is. So Hillary, it really runs wide, but I would kind of revisit the best of the best, find a way to connect, tap all the ways to the brand new employee that started that day. And those employees can feel like they have a vision up and down the chain of command throughout the organization. And then my second comment, which Rich you can jump on top of this one if you like. I think there's a financial piece to all of this, you know, the Great Game is really good at this part. How do we connect everything I just said to financial results,? And how do the financial results ... how are those shared? How are people reacting to those and how do we discuss them in a productive way? So there's kind of two buckets there, kind of Strategy and Financial, and they need to mesh? Rich, I don't know if you have any comments on the financial side of things. I know you guys spend a lot of time and financial education for businesses, but maybe just a couple two minutes there might be helpful.
Rich Armstrong 25:08
Yeah, absolutely. You know, I think it obviously with businesses success of business is measured by financial success, right. And so that's our first step often in teaching people the business is to understand financially, how's the company doing. But we want to take that next step. We want to involve them to a point that they know how to influence those results, not just understand it, but influence it. And that's why I probably go back on the whole education ... what I've seen, I would almost put it in two buckets of most people treated as an event, like they'll do once a year there, they have an event that they're going to teach and communicate information, too.
2. Great Game is a lot about involving your employees and getting people to take the communication, education and doing something with it.
We really believe that it's more of a process and ongoing involvement of your employees in the business. And so I think that is an area that can really get people to take that communication, education and do something with it. And that's what Great Game is a lot about—helping people to build this as a process of education, communication, and involvement, but getting people to act on that information to improve the business. So going back to just the simple idea of teaching people financials, we often talk about informal and formal training. When it comes to that, yeah, I can put some people in a room and teach them what an income statement is, a balance sheet, cash flow statement is. That I can show them, here's how this company, our company, is doing right now. But where people really learn the numbers is that they work with the numbers. It's like all of us, right, we can go get the education, but if we don't work with it ... so an example of that within SRC, and maybe businesses we work with, is we provide people from all levels of the organization some level of line-item ownership around a number. Something that they're driving their particular way, that they can influence the number. And we go through weekly huddles where they forecast those numbers, right? And have to talk about what the variances of what that number is versus where he really needed to be to be successful. We get them involved in things we call MiniGames where they can kind of own their own Continuous Improvement Program. But that's involvement. And doing those kinds of things is where we see most of the education, and the real true understanding of the business comes from that involvement and continuous process, so to speak.
Tom DeSimone 27:58
And I think, ESOP companies, that really have a good education foundation, they're nimble, you know, Rich. I'm sure you see this all the time. Not everybody learns the same way. And just because you're teaching something, if they're not learning, they're not picking up on it, you can't fail out and say, "Look, my employee base just doesn't really get it. They don't understand the ownership." But perhaps it's the way we're teaching it, is the problem. And so I think the best ESOP companies, Hillary, back to your question, now, they find ways that work, and they abandon the ways that don't work, you know, they alter them, or they switch the way they're teaching or involving people. And that way, they're working very hard to make sure that all the stakeholders, all employees of the business, they're being involved, as Rich just discussing.
Rich Armstrong 28:48
The only other thing I would add is that if you do that, right, it just becomes part of the way you're running the business, right? It doesn't have to be something additional because a lot of people look at this and say, "Boy, that seems like a lot of work to create an ownership culture," right? It doesn't have to be. It's just part of the way you run the business every single day and how you hold each other accountable and how you share rewards and how you get people excited about the future. So you want to make sure people can kind of connect that this doesn't need to be an additional thing you have to do.
Hillary Hughes 29:23
Well, and so with that additional thing in, you know, really within ESOP, a lot of people are executing in their daily role. And then we also have the ESOP education piece in that creating ownership mentality piece, and what you described is very interconnected, but it's also a very continuous process where there is a measurement, there is reporting, there is accountability. There's follow-up with that. And so, a pretty integrated process, I guess. Where would you recommend getting started? I know you have the Great Game process, but just kind of an easy like, Here's step one, rather than worrying about creating this large integrated process, like what do you see is just the first initial step,
Rich Armstrong 30:11
I think it comes back to what Tom was talking about - the importance of transparency is figuring out what you're comfortable with and sharing about the business. Right and getting people to understand where the business is today. And what you're sharing, educate them on, so they can really understand that information. And taking those kind of first steps to just be more open and talking about the business and sharing information about a business. Tom mentioned about not only just the financial side and the operational side, but where's the business going in three to five years, you know, strategically, where do we want to go? What's happening in our marketplace, our customers. Believe it or not, your people love to hear that stuff. They don't get to involve themselves with that. And when you do involve them with it, they have a much better understanding of the big picture, right? That, hey, I'm part of something much bigger than just my role in this business. So just those simple things, you know, just communicating. Sharing is definitely a first step. You certainly want to educate your people. And it takes some training. But I know I sound like a broken record, but it comes back to, yeah, take those first steps, but that's gonna get old after a while, right? They're really asking, Okay, so you're sharing all this information? You're communicating all this information, you're educating me on all of this. But are we empowering our people to use that information to make a difference? And that's where the next step is. In what does that look like that could be, you know, taking line item ownership, like I talked about. Or running a MiniGame or being involved in helping to create the financial plan or the budget ... that I'm going to be held accountable for those kinds of things that you do naturally in business. You just do them with a much broader group of people.
Hillary Hughes 32:20
Great, thank you. I just wanted to take a quick pause here as we continue to move through our discussion and questions. Just wanted to encourage our attendees. If they have any questions, either for either panelist, Rich or Tom, feel free to enter those into the chat. And we'd love to have the opportunity to address as many of those as we can as we continue to go through. But kind of with this process wanted to tie it back a little bit. Tom, how do you see this connecting with the ESOP valuation on an annual basis? We're talking about really impacting the financial results. And I'm just thinking from an ESOP. Like, that's the major I see on my participants' statement is the share price. So how do you see this connecting together?
Tom DeSimone 33:13
No, I think the ESOP valuation, it's like this mysterious Wizard of Oz that happens behind the curtain, you know, and everyone just, they're waiting for the day where the share price is announced, and everyone's shocked or not shocked, and, or right where you thought it was going to be. But there's just doesn't seem for a lot of companies to be this connection to the ESOP valuation conclusion. And I think there's two really main reasons for that Hillary. One is ESOP valuation, and valuation in general is it's complicated. It's not; you just don't hit a button, and out comes a number in the book, we hit our numbers. So this is what happens if there's a lot that goes into valuation, there's things that internal drivers of value that we as a company can control. And there's external value drivers, we as a company can't control things that are happening in the public marketplace. But what we can do is we can talk to our employees about the valuation itself. What were those value drivers? How did we, what were the results that we obtained? So think of let's pause there for a second think of an example where you don't share financial information with your employees? And they don't know, generally speaking how the business is doing throughout the year, or maybe there's touch points, but it's so high level that I'm hearing what the company's telling me but I don't really know if we are are we doing good? Are we not? If there's a way where employees can understand not only everything that Rich was just talking about, here's our behaviors, and here's the stake in the outcome. Here's how we're driving those line item responsibilities. They start to see the bigger picture, and now they know when we get to the valuation Okay, here's the things that are going to go into that valuation. We didn't do so well in this part of the business, but this side of the business really hit it. Two is valuation education, valuations confusing complex, as I mentioned. So every year employees should get together with either the trustee or management team, but somebody to help educate on what does the valuation look like? What goes into it? How does it calculate it, and what comes out of it. And that way, now with those two components, employees could start to bridge the gap on activity, behavior, and value conclusions, connecting the behaviors. That's why when I started way, at the beginning of our webinar, today, I made this comment, connecting the behavior to value is very difficult thing to do. But everything we're talking about today is really enough for to in an effort to do so. And then maybe I'll just follow up with one last piece, if it does come down to transparency. Sometimes, the business is doing so well, that it's taking money. And it's investing into the future, that may not have an immediate return in the valuation, but it has a immediate return to the stability of an organization. And it's very difficult to understand that when you don't have transparency. So take a quick example, let's just say your share price should have gone up 10%. But instead, the company took some of its profits reinvest into something that really won't come into fruition for three or four years down the road. So instead of getting 10%, the share price only went up 8% employees may not understand they might just say hey, what the heck it is just doesn't seem right. I've worked so hard, and values not going where I thought it would go. But in reality, the success of the business afforded itself the ability to invest in its stability, which for a long term, ESOP retirement plan, long term equity value was a good thing. And you'll get that return. It's just where did it go? And so those are kind of really the, if I had to put in three main categories, education, valuation, transparency, and performance, and then two or three, excuse me, transparency and direction, those are the things I think about when I am thinking ESOP valuation and ownership mentality.
Hillary Hughes 37:30
I think it's great. And I think really having that transparency, to be able to tell that connected story makes a lot of sense. And I think a lot of times we've heard from ESOP companies that maybe employees, you know, you talked about it, the kind of the where am I on the ownership spectrum, I am an owner, you know, or maybe I'm lower on the spectrum. But sometimes there's this skeptical Is it real. And when you have a result that doesn't, you know, a change in share price that doesn't align with how they felt the performance to be. It just causes that disconnect. And I think of 2020 is a great example, a lot of companies felt hard times. But maybe they didn't see the decrease. They anticipated in the share price, because they were benefits of the stimulus of PPP funds that helped shore up their equity investment. But not being able to communicate that really creates a disconnect of, I don't know, you know, we could have a great year, and maybe it doesn't go up or, Hey, there's nothing that causes it to go down. You know, his opposite. Challenging as well.
Rich Armstrong 38:43
The only thing I would add to that, I think this is another reason for the repetition, right? What Tom and you have described about understanding valuation is complex. And if you tried to do that once a year to explain a stock price, good luck, to stick but what if they're talking about earnings and talking about the Marketplace on a weekly basis on a monthly basis, by the time you come to your ESOP evaluation that you are, you're just reinforcing what they've been hearing all year long. And I think that's sometimes where I think some companies miss it is they make it an event then and said is not a process. And repetition is your friend that you can just continue to communicate it ongoing, it'll stick much better.
Hillary Hughes 39:38
That's a great point Rich, so as part of creating that repetition, the ownership mentality engagement. You're right, that repetition implies a high level of intentionality and accountability. So who do you see typically leading on implementing this steps necessary to drive the ownership mentality?
3. Driving ownership mentality begins with leadership.
Rich Armstrong 40:05
Well, I think it begins with leadership. I think they got to model the way they have to show every single day that they believe it's important, and that they are willing to take the time to communicate and educate everyone in the organization about the business. So it starts there. And where leadership can find the time to do that is it goes back to the idea that building is a process, right, building is just this is the way we're running our business. We have weekly huddles, we're going to go through for forecasting, we have twice a year, we're going to share where we are in the marketplace and where we think we're going to go in the next three to five years. Those are leadership responsibilities anyway. Right. You're just involving people in that in some way. So it starts with leadership. The other thing is, then, you know, another good practice, I think, is then taking the ESOP committees that are pretty common within the employee ownership world, but maybe expanding their role a little bit about being the stewards of that process, right, where you have an ESOP committee that that has new leadership, and, you know, frontline employees on this committee, and they take a role and are we educating people? Are we communicating this and really be that sounding board to leadership? Is this really connecting with people and taking a role with that, but not just in communicating, you know, the nuts and bolts of an ESOP, but communicating the business what how the business is doing and how it's working and how they can be involved in it.
Tom DeSimone 41:43
Okay, I think the ESOP committee topic is an interesting one, too, because a lot of you know, maybe going back to Hillary, your question, he said, education, no, a lot of ESOP committees traditionally have been set up for outbound knowledge sharing. We're an ESOP committees taking something and educating outward to the rest of the groups. I do think, kind of the best ESOP companies are also an inbound source of gathering information. And what I mean by this is, sometimes employees they don't feel like they don't know where to go, they know where to go to say, Hey, I got a great idea. I just am not really sure how to flush it out. I don't really know who to tell in an ESOP committee is generally made up of your peers or have some of your peers on that committee. And if these have committees, listening to the employees, and understanding, hey, here's what our employees are wanting to know, or wanting to learn, they can go back to management and connect that strategy again. So now there's this liaison being built on but it's, it's so much of a learning committee as it is a educating committee as well.
Rich Armstrong 42:56
Did you take an example like SRC, and many of the practitioners we work with if they're employee-owned or not have what we call ownership culture committees or Great Game committees, but their primary role is to be stewards of the culture and teach them the business making sure that we're walking the talk and doing the things we're saying we're gonna get to do. The ESOP communication is a byproduct of that, because it's part of the process, right, it's a stake in the outcome. But when you kind of lead with the culture first and then teach the ESOP basics. I think that there's more appreciation, and people are pulling for that education rather than feeling like it's being dumped on him. So I think that it's just a little bit broader definition of those committees.
Hillary Hughes 43:55
Great, thank you. So one of the other questions we have, and this is a common theme, I've certainly heard from some ESOP companies is the challenge. The challenge of overcoming the I'll see it are all believe it when I see it mentality in terms of really the ownership stake or the value of their ESOP account balance. How do you respond? Any tips for overcoming this? And, you know, is sharing potential value gains helpful or what have you seen work in situations where there's a skeptical employee-owner or employee base?
Tom DeSimone 44:39
No, I think for new employees and ESOPs, this is very common. They've never been part of an ESOP. They don't know how it works. And they're frequently asking, you know what, I just don't know. It seems too good to be true. I don't understand how this could be. What you're telling me how this could be real. And some of it is just time will tell for that individual, give it a year get one, one or two statements and you start to see, okay, well, this, this is a real theme. Now how do I get connected to it? I think to dispel some of this and to calm it down, goes back to what Rich was saying earlier that the ESOP valuation and the value kind of conversation should not be a one time of year event. The way to get rid of this comment is frequent conversation around the health, the financial health of the business. And what that is meaning to retirement plans or employee ownership, or maybe it's a quarterly bonus that maybe it's not even ESOP related. But nonetheless, it's this whole idea that I know you only get to see your evaluation once a year, but for the other 11 months, here's what we've been doing. And here's how we're doing relative to what we think we should be doing. And it helps to dispel this, I believe, when I see it, because people are understanding where the business is going for an ESOP specific. Sometimes it just takes getting them that one statement for them to believe that, hey, this is a real thing.
Rich Armstrong 46:13
I think a, you know, maybe this is more of a tactical approach to it. You know, there's newer, ESOPs right, you're brand new, so they don't have any experience at all, and they're waiting for the first statement. Or you could be a brand new employee in like SRC has been doing it for 36 years. But they don't really get it yet, because they haven't had a significant increase in their value. What we've done is having someone on ones with employees that have been around for 10,15, 20 years. And having the you know, it's really cool to see the conversations as I've been right where you've, you've been, I didn't believe that this was real. And I can tell you now. I believe it's real. And it's that kind of one on one with another person that's, you know, been in their shoes. Right. And so I think that's another way to get them to look forward to what the possibilities are. And I think you can do that even with a new ESOP by maybe bringing some other ESOPs more mature ESOPs in where they can talk with, with the employees about what they've seen as the impact of an ESOP on their quality of life.
Tom DeSimone 47:30
We have a client that does, it almost looks like a stock market ticker. And it they have a in their office, there's a big round office space, and along the wall, it almost looks like a stock market ticker. And it's the ESOP share price. But what it shows is historical share price movements. And it's just a constant reminder of the success that they've had. And I suppose if it's going the opposite way, it's a past reminder that, hey, let's get moving to turn that around, right. But this company's fortunately, had several years in a row of very good value appreciation. But nonetheless, it is a visible sign. And it's not just words from, you know, an executives office that maybe you don't see very often, it's a sign out there that is showing, here's exactly where we're at, here's where we were, or where we been. And so just ways to, to show that I think are very helpful. And then one last comment here. We have a company that does celebrating achievements, they're trying to figure out, hey, how do we get employees involved and celebrating the success of the company before they're invested before they have a lot of value in their ESOP. Sometimes this is, well, it's going to take me multiple years to get enough value in the ESOP that makes me feel really good about it. So they created other ways to celebrate the success of the organization. If they hit their three-year aggregate profit goals, the company pays for a weekend trip somewhere. So it's, you know, things like that, that are just helping connect the success of the organization to the people creating that success. And there's a million different examples, but those are just some of them that I see out there.
Hillary Hughes 47:30
Great advice.
Rich Armstrong 48:31
I do think it's important just to re-emphasize what you're saying about the short term, medium-term, and long-term rewards, right? Really think about, you know, those short-term 90 Day celebrations that you can do to show that people are progressing on the success of the business. But also, you know, good strong bonus plans where on a quarterly basis, they can see what they're getting return on some kind of earnings growth because you can always have those opportunities when you're sharing that to talk about the behaviors that created that bonus but also tie it to valuation, right. Well, if we had the same multiple that we typically get what you guys just did this last quarter is increase the potentially increase the stock price by x, you know. So there's a lot of ways to connect that on the short term, medium-term and long-term rewards.
Hillary Hughes 49:23
I think that just goes back to an earlier comment that was made about, what are you doing on a daily basis that I believe that when I see it, it really is this finite point, or it's the once a year, but maybe part of it is just redirecting back to what's important today? What are we doing today and this week for those short-term goals? And also thinking about from the process of the game of what are we doing to win today. And it a little bit redirect the behavior, it may not satisfy the immediacy of what they're looking for a year from now. But it is giving a win for today in a win for the short-term. Um, one of the other questions that came in, and I think it was kind of in that same segment, just saying, you know, what if the response is I'd rather have a 401k? And it seems like that's the start of a dialogue. But maybe going back to the transparency of understanding, where does this fit in? Overall in the picture of the company, what is the ESOP mean? Where are we going strategically? How is this impacting our financial results? Just wanted to get your thoughts on any other ways that you might respond to a comment related like that?
Tom DeSimone 51:42
I could jump in. You know, I think most ESOP companies don't have the ESOP or the 401k, they have both, and perhaps they're not doing the match, but yet they still have the 401k. So some of this Hillary, I think it's just around education around where the buckets of retirement money is going. And what it means to you as a beneficiary of all of that. Where I do see this come up frequently is, as folks get closer to retirement, they tend to, like the 401k idea before they understand everything, because they think of a diversified portfolio they have more control over. There's lots of ways in an ESOP to talk about diversification and getting money out into a 401 K program. So I think some of this is, is education-related. And then finally, for the younger folks coming into, into an ESOP. Lately, I've been hearing a lot more of not the 401k, but I rather have the cash. They just, it's everything, it's just about cash, cash, cash, and again, it is starts to turn into a conversation of education. The ESOP community's not it's starting to abandon the retirement plan, versus a wealth generation tool, calling an ESOP a wealth generation tool, just trying to get the word retirement out of there. So, you know, I don't know, Rich, if you have anything else that you've seen, but I do think that folks that are concerned about whether money is going into ESOP or their 401k some of that is just education based to let them see how they can still control a lot of their retirement money.
Rich Armstrong 53:25
I think that that certainly is the most important side, I know, it's a it's a discussion, even with us at SRC now of, you know, you're trying to attract and retain employees that are wanting that instant gratification. So I think that there that balance and stuff is important. I go back to the short-term, medium-term and long-term rewards is the show that they're trying to get them to understand the whole concept of, you know, a bonus even is still, you know, working for a wage providing $1, you know, dollar for $1. But when you're talking about wealth creation, you're talking about the multiple, and that's really how people generate wealth. And it's a hard conversation, but if you're teaching them business, and really understanding that's how the have nots, or the haves have made it right is through wealth creation. And so I think that there's ways of just continuously educating people on that.
Hillary Hughes 54:29
Hey, so one of the last questions we have here, you know, what if employees are not in a single location and now with more employees working remote or hybrid, and then some companies being a combination of union and non-union employees is this type of engagement possible from an ownership mentality standpoint?
Rich Armstrong 54:53
We have experienced work with companies that have definitely have made it work and work really, really well. If you take the first, you know, challenge of just the remote workforce and not having people write with you, I think that that's just something over the last, you know, 24 months, we've all figured out how to do better, right and, and still engage with our, our teams and that sort of thing. So I think that can be worked out. The union, we have examples, and this is not in an employee ownership world, but companies that have had some part or all their employees as union employees. But I feel the concept of getting people to take ownership and understand the business is probably the most significant divide that's happening within union and non-union anyway. So if people could just understand the realities of the business, and we have a trust and respect for each other is going to make a difference. So this core principles still work with them. And we have this, you know, this type of practice working with Union facilities all the time.
Hillary Hughes 56:13
Great. Well, I'm going to borrow Rich from how you end your podcast. I know you like to ask one final question. So we have just a couple minutes for each you and Tom, what is one question I should be asking you on this topic?
Rich Armstrong 56:32
Well, I, you know, I think we talked a lot about transparency today. And I'm guessing that there's probably a lot of CEOs and leadership, that's listening in here that are still very concerned about being that transparent, it's still it's still a constraint. So I, you know, maybe the question is, how do you resolve that issue? Right? How do you take that first step, where you don't have that fear of transparency? First of all, I just recognize that it is a real fear. I mean, they, you know, it could be a variety of reasons, they think that the employees are not, you know, going to use the information. You know, the one that I hear a lot is that man, if they knew what the profits were making, they're going to ask for a raise, you know, well, guess what they already want to raise, they're already asking for a raise. So it doesn't matter. But if they understand the reality of the business, they may be put their raise in more perspective, right. And I think that's what it really comes down to transparency is, perception is reality. And it doesn't matter if you're not sharing information with your employees. Your employees already have a perception about what that reality is. And often from our, you know, experience, that can be as much as a six times gap in perception, meaning that if you're making 5%, to the bottom line, they think you're making 30. So think about the decisions and actions they're making based off of that perception. And if you just open it up and share the reality, would they make better decisions for you, which is really what, what this is all about?
Hillary Hughes 58:12
That's great. Thank you.
Rich Armstrong 58:16
You're up, Tom,
Tom DeSimone 58:16
I think. Yeah. Yeah, I think one question that oftentimes comes up is just how do we better communicate the value of the ESOP. And we talk a lot about connecting the drivers to all of it, but how do we just tell people what they're going to get? And it's a very difficult question to answer. But when you start talking about ESOP sustainability, how do we sustain the ESOP and our company being an ESOP company? One of the first things I always go to is, what is our targeted benefit? What do we want ESOP to be? Do we want it to be a random benefit based on profits and people retiring and recycling shares inside these, or do want to control it. And as a board, you could say, Look, our ESOP should be generating a 12% value to participants a year, this doesn't include appreciation, stock value is just we as a company are going to put in 12% of payroll per year into the ESOP plan. So we can go and tell employees, you are going to get 12% of your comp in the form of an ESOP contribution every year. And if that comes in the form of stock, that stock could appreciate or depreciate over time. But nonetheless, we could still have that backbone of the 12%. So when I when I really start thinking about how do we communicate the value of our use assets? The first place I go, is, well, what do we want it to be? And that's the whole the tail wag the dog analogy. If we could take control over that value, we'll have a lot better chance of successfully communicating it.
Hillary Hughes 59:55
That's good. Thank you. Well, I think we're here at the one o'clock mark. Certainly appreciate everyone and the questions that have come in over this past hour. Thank you. We just want to make you aware of a couple other if you're interested in this topic, we do have a podcast that we were able to co-host with Rich and Steve Baker from The Great Game of Business. The Great Game of Business and ownership transition. It does not happen overnight. And then also a recording from two others at Prairie, Tom, as well as build on ownership culture, employee resilience, and motivating the millennial workforce. So thank you for joining us today. And have a great rest of your week. Thank you.
Announcer 1:00:42
The "Change The Game" Podcast is produced by The Great Game of Business. To learn more, visit greatgame.com.
