The Importance of Strategic Planning and
Operational Audits in Employee-Owned Companies

By Anne Taylor

FED Group

Anne Taylor, Rady MBA Candidate 2012

The Beyster Institute has educated us about the various tools used to transfer business ownership to employees. These include employee stock purchase plans, employee stock ownership plans (ESOP), phantom stock and stock appreciation rights, all of which are important vehicles for sharing wealth within a company and building wealth for the individual employee owners over time.

Mike Re, CEO of Swinerton Incorporated has been a part of the company since graduating from Golden Gate University in 1973. Swinerton pursued creating an ESOP in 1985 and is 100 percent employee owned today. During a presentation at the Rady School of Management, UC San Diego, Re said that ESOPs don't make anyone rich quickly, but if an employee works hard and remains loyal to the company, the ESOP can provide a substantial amount of wealth come retirement age.

An ESOP allocates shares to employee accounts consistently over a period of time. The share prices rise as the employees (who feel invested in the company as individual owners) continue to work hard, innovate, and think of ways to make his or her business grow. "The primary significance of being part of an employee-owned company is the individual accountability for results and for each other," said Re. "You're not just out for yourself, you're looking out for the good of the entire company."

At some point though, an ESOP's shares become fully allocated, meaning that there will be no more shares to distribute. This problem, often called the "haves and have-nots," represents the time when new employees might not have any shares to acquire while the more tenured employees may own all of the allocated shares to date. This issue requires managers to be vigilant and make sure that both old and new employees continue benefiting from the ESOP.

Mike Re and Swinerton use strategic planning to foresee any issues related to the ESOP. "A lot of it is our mindset. We know that employee ownership needs to be self-sustaining and perpetuating. It can't be a one-time transaction and then we forget about it. We do great forecasting to estimate what our repurchase obligations will be and we don't retire those shares; we recycle them back to the employees. It's having the discipline to realize future plans," said Re.

By drafting different scenarios with variables such as high departure versus low departure rates of employees and high hire versus low hire rates for new employees, companies can better draft a timeline for ESOP modifications. At Swinerton, a strategic planning session every 10 years tests the vision of the company as well as its ESOP. "We look at different scenarios of what our world might look like years down the road," said Re. "Will there be another recession? A booming economy? Political scenarios we should be aware of? We then test our values and vision against those different scenarios. We try to see if our vision will stand the test against these different situations."

Operational audits done by consulting firms such as the Beyster Institute also play a role in guiding companies toward the best way to continue the motivational and structural benefits of an ESOP. By modeling and testing different options such as the reshuffling of shares, the re-leveraging of the ESOP, or the contribution of newly issued shares, a company can prolong the positive effects of the ESOP by addressing the issues before they become a problem.

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Mike Re, chairman and CEO of
Swinerton Incorporated

Watch Mike Re, CEO, Swinerton Incorporated, during the 2012 Employee Ownership Briefing.

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