Private equity giant KKR's manufacturing division has successfully implemented broad employee ownership. The motivation is not altruism but a strategy to increase profitability. By aligning incentives and moving away from an extractive mindset toward labor, they achieve better financial results, showcasing a market-driven path to inclusive capitalism.
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The 20th-century view of shareholder primacy is flawed. By focusing first on creating wins for all stakeholders—customers, employees, suppliers, and society—companies build a sustainable, beloved enterprise that paradoxically delivers superior returns to shareholders in the long run.
Serial acquirer Lifco improves post-acquisition performance by having sellers retain an ownership stake in their business. This goes beyond typical earn-outs, keeping the founder's expertise and incentives aligned with the parent company for long-term growth, rather than just hitting short-term targets.
The most powerful incentive for increasing employee ownership is to make founder exits to their employees tax-free. This aligns financial self-interest with a social good, making it more profitable for a founder to sell to their team than to private equity.
A founder who hoped to one day sell his company to employees was advised to start now. Implementing an Employee Stock Ownership Plan (ESOP) early aligns the team with the long-term mission, shares the burdens of entrepreneurship, and builds a sustainable, purpose-driven culture from the beginning.
Granting stock options is only half the battle. To make equity a powerful motivator, leaders must constantly communicate a clear and believable narrative for a future liquidity event, such as an acquisition. This vision is what transforms paper ownership into a tangible and valuable incentive in the minds of employees.
To ensure true alignment and 'skin in the game,' offer proven managers the opportunity to buy into the HoldCo's equity rather than giving them stock grants. People value what they pay for, creating a stronger sense of ownership and long-term commitment.
Giving management 15% equity instead of the standard 10% is a small cost to the sponsor (e.g., an 85% stake vs. 90%). However, this 50% increase in potential wealth for management creates significant alignment and motivation, leading to a much larger overall enterprise value that benefits all parties.
While bonuses tied to revenue incentivize employees to perform specific tasks, they are purely transactional. Granting stock options makes team members think holistically about the entire business's long-term health, from strategic opportunities to small cost savings, creating true psychological ownership.
Les Schwab wasn't in the tire business; he was in the ownership business. He gave store managers 50% of the profits, requiring them to reinvest their share until they earned their stake. This turned employees into obsessed owners who consistently out-serviced and out-competed rivals.
Contrary to a shareholder-first dogma, these leaders operate on an employee-first principle. They believe that well-treated, empowered employees provide superior customer service. This creates loyal customers, which drives sustainable profits and ultimately delivers superior long-term returns for shareholders.
