In the News: Increased Management Accountability, Succession Planning, Addressing ESOP Misconceptions

Windings Inc. (New Ulm, MN)

Business feature: Windings Inc. tells the story of Windings Inc., a 43-year old contract manufacturer for electric motor parts for the aerospace, automotive, medical and factory automation industries with nearly 100 employees. The ESOP, which currently owns nearly 75 percent of the company, has been good for everyone:

Scott Ward, a vice president of Windings, said the employee ownership has been good for the company, good for employees and good for Ryberg (the owner).

"Employees build up equity that they take when they leave. They start asking more questions about how the business is run. They have a stake in it and they hold the management accountable," Ward said.

The article notes that the company, which had no family members involved in the business, had a succession plan in place, and the owner is now taking a less active role in the business:

"We chose an ESOP as a key element of our succession plan because I want our employees to have the opportunity for substantial benefit from the continued growth and profitability of this company they helped build," Ryberg said.

Ward and vice president Jerry Kauffman are the top executives of the company, while Ryberg has taken a less active role in the business.

The Minnesota Employee Ownership Fund, a non-profit institute with a mission to "promote economic activity in Minnesota communities," believes that ESOPs are the "best way to ensure companies, profits and jobs stay in local hands." They highlighted the importance of succession planning and the appeal of ESOPs to baby boomers:

"It's key that an owner plan for an ESOP early — while they are in their upper 40s or early 50s. "It takes some time to do it."

Baby Boomers and Succession Planning

Last year the first baby boomer reached retirement age. More than 5 million companies (UPDATED 3/2/08) will be looking to transition the ownership of their company in the next five to 20 years.

Windings Inc. had a succession plan in place. A recent PricewaterhouseCoopers survey found that 30% of CEOs do not have a plan in place. The number increases to 53% for family-owned businesses. Companies that do not have a succession plan in place will likely end up selling to a third party at the last minute. If more business owners took the time to identify their estate and succession planning objectives and considered all of their alternatives, many would find an ESOP to be a great fit for their situation. Unfortunately, most companies without a succession plan end up waiting until the last minute and are forced to sell their company to a third party (and often at a discount).

Addressing ESOP Misconceptions

The article also does a good job of providing a high level overview of how ESOPs work, including addressing some common misconceptions about ESOPs:

• Most ESOPs are entirely employer funded, so no employee dollars are at risk.
  
  Ward said there was skepticism and suspicion when employees were first told about becoming owners. One big worry was that employees would have to put up and risk their own money, which isn't true. ….But it's not like a 401K or something, where the employees put the money in. There's no out-of-pocket money at risk," Ward said.
  
  
• While the employees are now owners of the company, they cannot fire their co-workers or bosses.
  

  To replace the oversight of an owner, ESOP businesses have a board of directors that monitors the management team. An independent trustee ensures the board is acting in the company's best interests.
  

  Ward said nothing else changes in how a business operates and employees and managers have traditional roles.
  

  "We had some people joke that now that they're owners they can fire their co-workers, but it doesn't work like that."
  

• Employee ownership can potentially improve the relationship between management and employees because they both have a vested interest in the performance of the company.
  
  Ward said having a shared ownership, if anything, eases tensions between management and employees because employees know that moves to increase efficiency and increase profits will directly benefit them.
  

  "It keeps us on our toes, too," Ward said. "Employees have a stake in our decisions. They'll come and say, 'why are we building up inventory?' which usually isn't a good thing. And we'll say it's because we're trying to get into these new markets and it'll increase sales. And they'll say, OK, that makes sense.
  

  "So management has scrutiny from the board and from the employees."