EP29 - Fast and Furious - How Do You Gain Support For Your ESOP

This episode was inspired by the recent NCEO conference and provides a good overview for those that are new to an ESOP or those who have recently transitioned to an ESOP. The podcast discusses the need to build the employee-ownership concept as a vibrant part of the culture of your company.  As we go through some of these concepts, we will address the audience, frequency, repetition, and plan for ESOP communication.  This can affect each employee-owned company differently depending on where the company is in their development whether that be a new, young, maturing, or mature ESOP.

Transcript

[0:09] Hey everyone this is the journey to an ESOP and Beyond podcast we're all about esops in terms of pre- ESOP post ESOP. If you're thinking about an employee stock ownership plan this is a podcast that will give you, a lot of insight into multiple topics it's our fifth season and we're working through a lot of different episodes this year that I think are helpful especially for the post season or post ESOP type of. Uh ESOP where you're looking at um issues that come about after the ESOP that's what's the today is going to be about but I'm going to kick it off with this.

[0:45] In the mad scientist got a rip apart the block, and replace the piston rings you fry.

[0:58] Ask an eraser any real eraser.

[1:01] It don't matter if you win by an inch or a mile and winnings winning.

[1:16] Fast and Furious, is part 1 so this is the very first movie I think was produced back in 2001 and so this is. The uh after the first race and just that Vin Diesel's kind of giving him a little education what I like about this as we start off today is issues or initiates the topic that we're going to get into which was really.

[1:42] Can encouraged I guess from my perspective by the recent presentation that uh we had done, at the nceo conference up in Indianapolis, and so with that we're going to be like talking about Off to the Races Fast and Furious and the topic that we covered in the presentation was about how do you gain buy in for your ESOP through effective communication and it's really 1 of the things that that is I think a bit out there and that there's not a standardized there's not like this book you're going to go by I think and you know give you all the answers to the to this issue there are books there are, people that have spoken about this there are all kinds of of you know different ways to go about this but there's not, there's not and there probably never there should never be probably in a sense because this the communication side of of the world when it comes to business is really about, aligning with your cultureand aligning with the core values of how your company functions and this is this is really kind of established I think at the very beginning when you even before you do these up and 1 of the things about why you would even want to do an ESOP is partly is to continue with what those core values and what those the cultural um value of the business is as well.

[3:06] That that has been built adhere to and really been the compelling reason why people show up, to work at your place and so so part of the reason people do esops is that they want to continue that and I think you have to respect that when you're talking about communication so today we're going to get into um more of a post ESOP, issue as we think about it and it's important to be as we think about this is that there there there is no 1 size fits all and there are some things that we're going to recommend, and talk about that I think are going to be helpful um for companies that either are existing esops or even ones that are considering. Becoming an ESOP because it's it's really going to be about. Um getting prepared for this or jumping in and re-energizing what is important to your ESOP plan so, with that I will just kind of note again that the podcast itself. Um is available through our website at journey to an ESOP calm if you do have questions specifically please go to that website there is a way to put in your information where we can reach back out to you and and help you. Um going from there I would say.

[4:17] If you like the podcast share it with a friend I think it's most most important that you know people have resources to to dial into what this whole thing's about especially in areas where you know you you're dealing with possibly advisors that not are not really up to speed on esops, um it kind of just depends um you might know some things about ESOP so the podcast really is an opportunity for us to. To dig into some things that might be a good resource for you or for somebody else that you might know if you, like the podcast and you want to please rate and review the podcast um if it's a 5-star that'd be great and then from there just kind of keep listening and. Um we appreciate you you jumping in today if you're brand new to the podcast then um please again check us out on our website because journey to an ESOP cam has all of the episodes and you can kind of go back I know people that have gone back to the very beginning and when we first started in 2020 and just started downloading episodes which you know I've become much older since then but it is what it is anyway today as we as we dig into this fast and furious.

[5:24] The communication Off to the Races I chose Fast and Furious because of course it is about racing and there is a message here about building your your ESOP. To be effective and and ultimately of course when the sense of the race that you're trying to runand we all know um from a metaphor standpoint right I mean we all know that this idea is when you think about um how do you win the race you do nobody wins individually nobody, when's the you have you have people that work on the car you have people that race you have people that make sure that you know you've researched and done all the homework so this is a team sport no matter what ultimately 1 person maybe in uh Fast and Furious gets credit but ultimately it's it's about a team working together and so building buy-in for your ESOP is I think just a such an essential thing that.

[6:19] It kind of goes without saying so 1 of the things that I was inspired about you know kind of transitioning the podcast to be kind of the Beyond part was thatI think that there's so much, of um opportunity with an ESOP that is not. I repeat is not being really taken advantage of with ex the existing ESOP companies now that's a very blatant that's a very kind of broad stroke statement and of course there's a m many esops that are just phenomenal and they're just doing great but I think in general there's this this possibility that your ESOP could just be so much more valuable to your people if they really understood. What was at stake and so. Um when people do go through the process of saying you know I want to do an ESOP because I want I want my my people to be rewarded.

[7:13] That's a very valid approach right that's a very valid reason for people to say hey that's 1 of the 1 of the boxes I'm checking right nowto go through the process of of actually selling to an ESOP.

[7:26] And, inherent in that is that we we understand that there's benefits to the to the employee right we we get that and so the the possibilities that exist within the framework of an employee stock ownership plan you know I don't want to make, I don't want to overstate them or or say anything inaccurate right I would just say the first thing is just that it is an opportunity for an employee to build a a very strong retirement plan. Based on the value of the of the stock the value of the stock that they they as an employee.

[8:01] Are able to influence based on the the performance of what they're doing with their teams and ultimately as it rolls up to the company. And have a stake in what what happens if the company grows and it does well they do well, not just compensation wise you know based on their normal comp but they do well to build value for their future and for their families and so it's. The premise of an ESOP is that like we can help build value and I think statistically what we talk about is that.

[8:33] ESOP companies in terms of retirement plans for their employees have double the national average of of wealth in their retirement plan, then Nonie sub companies and that's a pretty pretty bold thing to say and the reason that that happens or can happen for what you're putting together for your own ESOP is that the value of the stock. Can can grow so much quicker. In comparison to a very well-diversified 401K portfolio so that's that's something we've talked about before but that's that's kind of the. The wealth creation behind the ESOP. All of that kind of assumes some things when we assume that the company is going to continue to do well if it has done well and continue to even grow um in terms of its next steps of of, post ESOP. And how it's going to grow its EBA and pay off debt and things like that as it does grow and become more valuable obviously that that's what's kind of the underneath part of of the fundamental part of what's what's happening.

[9:39] And also kind of and these are just kind of this foundational as I start to build the the idea behind what we want to talk about.

[9:48] Also the other side of it is is that the company does as they think about the value back to the company so we the value to the employee the value back to the company is that there is for the investment that the company is making on behalf of the employees. Which is specifically to incur debt. Leveraged by out financing that leveraged buyout financing then is paid off and so as the company incurs the cash flow responsibility of that what is happening is that they're they're purchasing the shares essentially for the employees the company is right and so we've separate the company the existing shareholder the company and then the employees and what we're seeing is that there's a there's an investment being made by the company the borrowing this money and paying off debt on behalf of these employees.

[10:35] And so part of that there if the companies making an investment then there needs to be a return on the investment so so some of the things that I I always think about as a finance person. In terms of making a business decision. Is what is the return back to the company and what they've invested and I think that's part of what we want to we want to understand better in terms of of.

[10:57] You know rolling this thing out and what the expectation should be and I think part of it that there's again not a lot of standardization when it comes to communication. And specifically measurements and some of the things that we measure in ESOP communication are things like employment Employee Engagement like respective to the, um how the employees are becoming maybe more engaged in specifically for the um because of the employee ownership that they they get to participate in 1 of the 1 of the things that came up in the conversation around the room in Indianapolis was. This idea that that if you're not measuring engagement within your company as an employee owned company.

[11:41] Um then you need to number 1 secondly if you're not measuring it specific to and tailoring it to, the employee ownership side of things and it's hard to really understand the data behind itso 1 of the recommendations came came out of that conversation was look, do you definitely do some type of measurement maybe every 6 months on employee engagement. Before and during and continually after as a follow-up to create a source of data that you can use to track, the impact of the employee ownership because with with that type of opportunity what you're wanting to see. Is that is how much this is actually improved engagement based on the initiation of the ESOP now the other thing that you're going to have that that's going to happen as we're going to talk about it is that you're also going to initiate.

[12:34] Communication campaigns and things that are going to be specific to hey we want to encourage different things in our companies learning um employee learning relative to employee ownership.

[12:46] Some of that has to do with the just basic concept of an an ESOP so if brand new ESOP company um as we talk about the stages of an ESOP, of course are going to focus heavy on at the front end of just explaining what is an employee stock ownership plan what does it mean for the employee. What does it mean for um the.

[13:10] You know just kind of basic compliance or requirements that the employees is is going to be able to participate in and so. Um and translate that to well you get this benefit you get this retirement plan you get these shares and then eventually those shares kind of grow in value so there's this there's basic knowledge there, um as you as you start to kind of peel away some of the um you knowthoughts that people have and and realize that sometimes. Um when you start breaking this down you're going to want to break it down in terms of your overall um audience that you will be talking to so when we talk about communication within an employee ownership. Context you're saying who is my audience right and so we're going to dig into that a little bit we're going to talk about the frequency of communication related to the the audience of how much or how often that that should. Occur in terms of repetition and then ultimately the written plan itself.

[14:08] And some of that has that is going to do have to do with deal with the idea of of what stage you're in and as we. Think about stages of an ESOP you have the brand new ESOP you have the the brand new baby we'll call baby esopsthat literally just got created right. And so that can be you're in your first year and there's a lot to do and that first year to help the the new aop kind of you know as a as it relates to communication um really bring the employees along and what we want to do. Is not go under this this kind of rule of thumb which is I would just say kind of hey they'll get it in 3 years right that's. That's really not good enough and I think when I 1 of the things I'm kind of saying as I say this is that I'm I'm a Believer in in.

[14:59] Getting after it and getting it done and not just waiting for things to happen to us right so proactively just jumping in so brand new Esau is going to have a lot of those types of things where you have brand new people in the plan don't know anything about esops and so being being very, um

[15:19] Understanding where you are in the stages is important as we talk about it as the company grows as the ESOP goes into the future then it eventually becomes like a young ESOP or more like a toddler. And there's things There's issues related to that as well that we want to focus on as it grows up to more of an adolescent you know it's kind of like okay we've got through a lot of the the first stages of things, where it was like more difficult now it's more more people really understand it but now what do we work on and then you have the maturity something more like a adolescent to adult right, now you're dealing with other things like repurchase liability, and and you know complacency those kind of things so so we want to kind of lay out these categories of who the audience is. What's the frequency of communication what's the repetition and then also what's the plan as it relates again to the new. Young the new ESOP the young ESOP the mature the maturing and then the mature. So having you know looking at that specifically 1 of the things I would say first is.

[16:24] When you're thinking about the audience and this is going to I'm going to talk a little bit from the brand new ESOP perspective and then kind of look at that from a a couple different perspectives.

[16:33] Ultimately whether you're brand new or mature I think all all the time you have to be in a position where you're thinking about communication as. How is it going to be perceived by the people on the opposite part of the table so. 1 of the things that has I've experienced for in our practice is. In this up and years ago but it was like this idea that I was kind of not shocked by but a little bit surprised by and and I was invited into this was before we closed the ESOP transaction and we were doing. Some site visit work with this client and the trustee and evaluation form kind of showed up later in the day but we took the first part of the day and we just spent some time with the employees, and we talked about what this meant so this this is kind of 1 of those things where it without getting too deep into um, when you should communicate the ESOP because this is kind of 1 of those cases where the companies like decided hey we're we're transparent like we're just, who we are we're going to talk about we've been talking about this for a little while so we want to just be continually transparent so they invited you know a group of employees not the whole group.

[17:40] Into a meeting with with us me and my team and we had this conversation about um you know just basic understanding of the ESOP so this is like pre-born ease up right it's brand new and isn't even brand new it's pre-born, and 1 of the things that I that that kind of stuck with me from that meeting was a a kind of a sense of what I would kind of categorize as career, anxietyin that what I saw people doing and saying was not. I was like hey I'm super excited and I know this is like such a great benefit to you guys and um hey did you know by the way that. ESOP is not something you guys pay for and some of the things that I just would immediately set rolling off where did the career anxiety come from and and part of it is is that really for considering.

[18:30] Perspectiveof the employee thinking hey my career track thing I was working towards now is. Is significantly different or in their minds it's uncertain.

[18:43] So 1 of the things about uncertainty that I believe is is really toxic with a company is that uncertainty does create more of a negative. Impact to a company than it does a positiveand so kind of to say that differently I would say that that people without knowing what's going to happen are going to probably think the worst not the best.

[19:06] And this was an organization that I would say was a healthy organization and that had a really good culture but within all of that we have to assume that people um even in a healthy culture are going to have a lot of questions and so so part of that saying it's important to stop and ask those questions. But get from the perspective that what we're trying to do is get to the perspective of what they're thinking about. As it relates to um what's in it for them, and that's and that's kind of an overused cliche in a sense but what I think there's a obviously a fundamental truth to that because 1 thing about. Experience of doing ESOP transactions is you work with the shareholders and you work with some of the key people you get the deal done and then there's this next phase of things. Sometimes the shareholders and the key people can assume that because it's such a good you know we've done the work and everything kind of aligns well with their goals and objectives. That and they don't do this in any way that I would say is is umyou know negative or or or even um. You know against the employees they just don't they don't consider the fact that the employees have different goals and objectives than they do and so sometimes they can assume hey this is such a great thing so taking the time and slowing down and asking some open-ended questions is I think really helpful.

[20:28] Because it will get some things on the table in the process that you want to get, um some some strong Buy in and in order to get Buy in you have to get people to talk openly about where they are.

[20:44] I live my life a quarter mile at a time for those 10 seconds or less. Free. So 10 seconds or less the idea that he lives his life a quarter mile at a time I wanted to use that just to kind of talk a little bit about this idea of how important it is to take. The the long-term approach to communication and and doing it in pieces right and saying hey we're going to do our best within this I'm going to just use the metaphor that he just said the quarter mile, what am I doing in the next quarter mile. Um in order to to maximize the opportunity within communication so part of part of that means is we as we think about. Um the next part of this is is taking the time.

[21:42] To make the most out of when I when we say frequency of communication what we're talking about is digging into some of the things that are important to make the most out of that that type of Engagement with your peopleso there's there's a lot of different ways to talk about these up alright so we have this whole you know normal thing which is kind of the rollout meeting the rollout meeting is running you close the ESOP transaction you do a big roll out and it's the big announcement and and I I would say that from my experience in uh is that like a lot of focus gets put on that which I think is great it's kind of like.

[22:18] Um another terrible metaphor might be um it might be like hey the wedding right we spent all this time doing the ceremonial wedding right. But the marriage itself is is kind of and if anybody's been married for a long time you know what I'm talking about right the wedding was such a big deal we got pictures and videos and it was such a a wonderful thing but when you get in the marriage that's really where the work comes from right that's really putting forth the effort for communication. And and so maybe that is a good a good metaphor what we're talking about is. And what is the frequency of communication in a brand new ESOP a mature ESOP or maturing ESOP, our young ESOP maturing ESOP in a in a matricea and I would say that they're all going to want to take some level of of of diligence in terms of being respectful to and sensitive to really what is happening and so 1 of the things about this, I believe really is helpful as as information to you is getting good objective advice from people um outside of the organization, or maybe outside of the of the um.

[23:27] Individuals that are kind of working through it and just assessing like hey where are we really you know objectively we need and I think that's probably more important for the beginning or the the more mature stops but the idea is that. You want to you you do want to look at your blind spots or you want to have somebody open your eyes to your blind spots and say oh wow we could do this so much better so don't be afraid of objective advice and the other part of that and I'm and I, I said this at the conference too I mean I really believe this. That from a practical standpoint there's so much cost that's rolled into the transaction and that's a whole another topic that we can talk about but and it doesn't have to be as expensive but just keep in mind, that a lot of companies have gone through these process, they've spent a lot of money on the transaction so when they come to the communication side practically speaking they're like I don't want to spend any more money so don't talk to me about advisors or you know people that can help me objectively because I don't want to spend any money and I don't want to get my debt paid off financially that's all good but it's like this like why would you not investin 1 of the greatest tools you have.

[24:37] To in improve Employee Engagement when you spent all this money already right why would you not invest to go all the way and I think you have to consider that the cost of an ESOP is not just the transactional cost it's the ongoing and it's not just the compliance cost on an ongoing basis the requirements of the Department of Labor it is it is going all the way with the process of building a strong ease up companyand so with that you have to focus in like how frequent is this going to be. 1 of the things we've gravitated to and we've done some episodes or 1 episode on this specifically is doing a monthly type of communication. That's already charted out for the company where there can be more of like a lunch and learn type of format. And if it's not monthly maybe quarterly but any anything beyond quarterly let's just face it I mean out of sight out of mind, um I think the the the challenge here is to make ita valuable source of communication. That's where the objective advice comes from from people right if you don't have it so so 1 of the things about frequency 2 is also in.

[25:49] In delegating out the responsibility and so part of I would say people that are listening that are existing use up companies.

[25:57] Um are going to say yeah we we've got a niece up committee so so part of this is to say how do you when do you create the ESOP committee what is the ESOP committee and then how what is the responsibility of the ESOP committee and and then other things like that like later down the road like how often should I change up the committee those kind of things and we'll talk a little bit about that in the in this episode but1 of the things I wanted to stress in considering the, the a committee of people that are separate is that you need to have people that are first off actively engaged in the company and if you ever have done like engagement surveying right you have actively engaged you have, disengaged people are actively disengaged right and you have these people that are engaged in the middle somewhere so it's got this bell curve I want people to the right of the bell curve that are actively engaged that are my you know maybe my myum respected cheerleaders I'd say that like really carefully right so sometimes we can have actively engaged people that don't have the trust and respect of the organization so the second thing would be I want to find people on that committee that are definitely that have built the years of trust and respect in the organization because those are the people that people are going to follow. So be careful to to select wisely I think sometimes committees are usually they're usually going to put like an HR person on there which is great. Um but they're they need to have some of those attributes and.

[27:25] Um they need to be the other part I think is kind of goes without saying they need to be passionate about employee ownership you know they need to be they need to understand this and and see that this is something that is good for everybody. And I think that can kind of help precipitate what I would say is ultimately, where you you need to move off of the dependency on an advisor and move into your internal structure of communication so the so the advice is like don't get stuck here with an adviser but use the advisors to set this up correctly.

[27:57] Use the advisors to see your blind spots and use your advisors to get you on the right trajectory and maybe do check-ins every once in a while but ultimately the responsibility needs to be internal, and it needs to be something that you guys Embrace as part of the the way you go about doing anything that you do. Um part of the other as aspects of frequency of communication for whether it's a a brand new or a matrice.

[28:20] Is it's kind of what I said before is the out of sight out of mind type of issue which is um I the idea behind that is like you've got.

[28:29] Um any cultural initiatives that you ever will do in your company and that could be you know like let's just say you're using disk as the personality, test and you want everybody to know like what their personality is because you're trying to strengthen you know more of an inclusive of an inclusive type of um. The culture to your company right if you start the you do the reports and everybody gets tested and everything and they don't do anything with it that's not going anywhere right uh maybe I'm trying to um build a strong culture of you know working towards the Excellence you know or continuous Improvement all of those things it's the ESOP is the same thing I mean all you're doing is making a cultural um initiative to build a stronger part of your culture the ESOP is a tool. To build engagement and so keep that in mind as you do this you know within the frequency what's going to happen. Is you're going to have the um understanding of what exactly is going you know to be charted out for your people right so what we're doing is we're moving past this roll out meeting which was the big. You know wedding thing that we talked about and now we're going to get into these categorical things that I think are really really important and helpful 1 of those being you know just in general the financial literacy or the economics of the business like how does this business really make money.

[29:51] And connective connected to that ultimately is is is the kpi like the key performance indicator to the employee what is the kpi to the employee in a new sub company. Ultimately it is the number of shares that they get on their participant statementand the per share value once a yearwhat I like about kpis is that they give people some level of. A scorecard to report how they're doing how the company's doing and then individually how they're doing it's kind of their own little financial statementwhat I don't like about kpis is that they're they're an. Well there are kpis that do different things but what the what I'm referring to is a kpi that's a that's a reactive result of all the work that goes into it right. So part of the scorecard concept is.

[30:43] That you have to be thinking about those types of individualized kpis that make up the whole. And give people more frequent information on where the company is and so part of the financial literacy training. Is is the is partly an embracing the idea that everything that everybody do does in the organizationshould matter.

[31:09] And ultimately coming back to like EOS. Which is tracktion 1 of the 1 of the principles of EOS is this idea that everybody in the organization should have a measurable scorecard some type of of measurement that they're being measured for and so if you Embrace that concept what what's happening is that maybe even on a on a weekly daily basis hopefully that that soon people are on top of what it is that they are doing, individually or as a team or as a department or as a whole now company connected all the way through from a dashboard all the way to the to the end in order to do what, in order to increase the value of shares that they're building in their retirement planand that's the connectivity between, the making sure that the audience understands what's in it for them.

[32:05] Building this financial literacy and then other things too are going to be important as we as we get into that to to the frequency of things.

[32:12] Because there's I think part of and part of this I would just say thatI think what stops people is that they lack. The communication creativity of of they get to a point where like well we've talked about this for a million different ways. And I get that and that's why I say if you start seeing individually in your company and assessing your company as as relatively weak in communication.

[32:37] Don't hesitate find a good advisor look at this issue and get people to come and help you write.

[32:43] Because it is so important to um build a strong investment in return on investment for employee engagement so, there are a million different ways to do this and this is part of like I remember just kind of as a as a parallel to this when I first started doing the podcast on esops you know I I always my partners would be like at my firm we're like what are you going to talk about like you know at that point I didn't know really what I was going to talk about I just knew there was a lot to talk about and I think it's the same thing for you guys I don't know what it is to talk about but I know there's a lot to talk about there could be celebration stories of hey this is what's happened how our our department is 1 how this kind of connects, um there's just a million things you get to do and so part of it you are looking for some skill sets in your organization that have a a strong communication skill set as another attribute to think about who should be on that committee um, you know I think sometimes people you know it just is what it is sometimes people are more analytical and they're more skilled in that area and sometimes and just being very generalist sometimes just people are just good at talking or or embracing you know kind of. You know not even talking sometimes maybe they're written they're writing is so good maybe you can do something with a um an internal blog or things like that in order to make it fresh and unique. Um I would not worry about too much repetition but I would be careful not to be so repetition so repetitive that is boring.

[34:12] Assessing the fact that you you know your people are are falling asleep. You know if you do a lot of meetings and you're the guy that you're the guy or the guy that's doing the meeting and you look at the audience and you're like oh man.

[34:25] Everybody's falling asleep that's not good right so you do want to be careful to um make sure that it's it's good content. Um so ultimately all of this is going to drive itself towards a written plan. And I'm going to final I'm going to finish this episode with this idea that if it doesn't get written now, then it's probably not going to get done and whether you're the author of the plan or your advisor is the author of the plan it's going to be collaborative but it needs to be written and you need to put together um. You know specifics within the plan that um I like I like some of the pop I like some of the, the stuff that you get from like EOS or whatever like the the vtos the vision traction organizers or you know there's all kinds of you know rocks that you can put together signing those rocks to the Champions with due date super important and then checking in on a frequent basis on where we are with those rocks but you know what gets written gets done and I think as we as we kind of close this point out I'm I'm just going to say really important to um follow through on the written part but be flexible on how it's carried out and and be open to you know.

[35:39] Creating like a a whole you know new new people involved I think you can go a lot of different places with this as time goes on so being flexible. Within the plan is important but if you don't have a plan you're not going to to. This is not going to happen I mean that let me just face I mean unless you're just 1 of those organizations that that hey we're not worried about it um strategic plans business plans, this needs to go right in there if you have a marketing plan you have an ESOP plan right so so make sure you do the plan make sure you write it down make sure you collaborate make sure it's a team, all of those things are important but ultimately um as we think about the beginning of what we started with is Off to the Races you want to finish, well and every year you run another lap right and every year what you're really shooting for is to get a better and better and better time.

[36:31] To beat your competitors and ultimately that increases value and that increases the the the strength and that creates momentum. And that momentum carries you forward right and so and if you're in a place where you've stalled out and you're and you're stuck in there they're working on the tires and whatnot that's okay. Because you got to get re-energized but be honest about where you are. And whether you're you're mature ESOP and you're kind of going through that part where you're trying to re-energize or you're brand new it's still the same race you still got to get back into it so, with all of that being said thank you for listening today and look forward to our next step on this journey to an ESOP.