Dear Public Officials, Leaders of Employee Ownership Organizations, and Friends:
I am John Hoffmire, one of the founders of this symposium, and am going to speak for about 25 minutes about Philosophy and Employee Ownership. There will be time for questions and answers at the end of my talk, so please take out your phone or a piece of paper and a pen and start composing your questions.
You are going to notice that I will pronounce three words tonight in a louder voice than I will use with other words. Those words are Know, Believe, and Hope. I will tell you why I will say these words louder in a few minutes.
Where we find ourselves tonight is a historic place. The Divinity School is a medieval building and room in the Perpendicular style. It was built between 1427 and 1483 and is the oldest surviving purpose-built building for university use at Oxford – specifically used for lectures, oral exams and discussions on theology. The Divinity School is widely regarded as one of the finest examples of Gothic architecture in the world.
You are sitting in the same places where students would have sat after the university decided that it did not want many of its classes held in church rooms. They were, even in the 1400’s, trying to break away from the traditions that bound Oxford University to the Catholic Church. Why they called this the Divinity School, when they were trying to pull away from religion, I do not know. But my guess is that it had to do with compromise, university politics, and the need to not offend important leaders.
I want to address a number of philosophical issues tonight. I will tie all of them to employee ownership.
The first has to do with the differences between knowing, believing, and hoping. To make a point about this topic, I want to first continue the process of telling you where we are. If you were to take a six-minute walk due south, you would find Mob Quad at Merton College, one of the colleges of the University of Oxford. Mob Quad is often claimed to be the oldest quad at any university, built in the 13th and 14th centuries. If you were to stand in the middle of this very small quad and look to the southwest and up to the second story corner, you would be looking at a window of the old library behind which is a very special book.
This book is worth a small fortune because of its hand-drawn pictures and the beautiful handwriting, as well as because of the fabulous intellectual material between the very special covers. It is about Zoology. And as you thumb through this book, you come across a picture of a dragon – the type that flies long distances. One can imagine how the picture of a flying dragon made it into a Zoology book at Oxford. No Zoologist could travel to every corner of the world more than 600 years ago. Communication was slow between continents. Zoologists and other scientists had to rely on their friends to report accurately what they saw. Zoology was an incomplete discipline. Many scientific paradigms were still taking shape. And, in addition, the printing press would not be invented until 1450. This added to the uncertainty of some things one saw in books, because fanciful drawings appeared in many of the one-of-a-kind books that were written and had to be recopied word for word and picture for picture if they were to be reproduced.
I would put the dragon book in the category of literature based on hope. I don’t think the author could say categorically that the flying dragon was real. He could not say in a way that we would understand that: “I know that flying dragons are real”.
I tell you the story of the book and the dragon for a reason. I want you to hold in your mind the concept of scientific hope, as compared to scientific knowing.
If you were standing at the window in the library at Merton, looking across Mob Quad, you would see the office once used by an ex-Warden of Merton. Henry Saville ran the college in the later part of the 1500’s. It was from that office that he translated parts of the Bible – particularly books from the New Testament – specifically Acts and the Book of Revelations. These both became part of the King James Bible.
Warden Saville might have said that everything he translated was knowable. That is to say, his position might have been that he knew for certain that his translation was correct and a meaningful contribution to a text of special importance. I would argue that the Warden could, at best, believe his translation to be of real significance. My thought is that he could not know very much for certain about the Bible or his contributions surrounding it.
You might ask, why is John telling me about a room, a warden, and a translation? Again, I want you to hold a thought. Please keep in mind that there was once a person (among many) who held philosophical beliefs, ones that spanned the Bible, what it was, and what it meant to be a translator. Some people would argue that Warden Saville was hoping.
By the way, I am not going to try and equate science and philosophy in this talk. Instead I want to categorize parts of the employee ownership community as science-based. And other parts I will call philosophical or theorical and attitudinal. I am going to argue that philosophies around employee ownership … act as guiding principles for behavior. In the end, philosophies are little more than guiding principles for behavior.
Before I go on, I need to tell you a bit about the way I experience life. I am a very mathematical person. My work in the academic world is significantly mathematical. In addition, I find myself doing strange things with numbers each day. I count every species of bird I see on my morning bike rides. If you are wondering, the number is usually between 15 and 26. In addition, I count the number of songs I listen to as I stream music each morning during my calisthenics and weight-training. This is all part of my trying to memorize, during that 45-minute period, the name of every song that streams.
Given that background, both you and I would probably find it a bit strange that Sartre, the Existentialists, and the Phenomenologists have become important to me during the 12 years I have lived and worked in Oxford. I am not at all professional about my existentialism or phenomenology. In fact, I am hardly even amateur. But, by far, the largest commitment I make socially is to a book club that I have been part of for the last 10 years here. I see the fellows who participate in this for at least two hours per week. And many days, I see them for even more time.
One of the members of the club is one of the top phenomenology scholars in the world. And a couple of the other guys have strong budding interest in the field.
None of them take Sartre, existentialism, or phenomenology in the directions that many other scholars do. So, if you don’t recognize what I am about to say, that is because of two reasons. My friends’ bent is different, and my lack of experience prevents me from communicating perfectly around these topics.
Essentially, my friends’ take on these philosophies and their leaders are from an alternative perspective. My colleagues would say that: We, as human beings must learn to be with those who carry the largest burdens. They would also say that we must be with those who suffer. Through this process, we build community.
One of the aspects of our book club is that I see all of the members in other contexts regularly. I know what they actually do in their interactions with others. And, to greater and lesser degrees, they all live the philosophy we have come to understand through the book club. All …treat those who are suffering with an inordinate amount of respect. All …go an extra mile to become acquainted with people who they would not have met if they had not made the philosophical commitment I have spoken about. In addition, all are willing to acknowledge that they suffer themselves. Furthermore, and taking this a step further, they, themselves, are willing to share with others in appropriate ways the fact that they suffer sometimes.
Now, I can hear you ask, how does this relate to employee ownership? My answer…. I am heading toward making the argument that the best of employee ownership companies, by the nature of their ownership, break down barriers and naturally cause diverse people within the companies to meet each other on a more meaningful and substantial level. I am not saying that this cannot happen in traditionally-owned companies. But it happens best when employees are owners.
What else happens in the best of these employee-owned companies? The whole group of employee owners eat together, they study together. And, depending on how big the company is, the employee owners learn when a colleague: has a baby, is ill, or experiences a death in the family.
I hear you cry out: “how and why is this any different in a good employee-owned company as compared to a good traditional firm?” It is because there is something significant about co-ownership that bonds people around both the upside and the downside of their companies. When managers share the financial information about an employee-owned company with employee owners, as most do, there is a bonding that comes both in success, and, in the long-term, from the types of failures that do not lead to liquidation. I am actually arguing that some collective suffering, when measured from a philosophical perspective, is actually good for employee owners – unless their company goes under.
Also, a good employee ownership manager gets to understand the employee owners throughout the ranks. They become aware of those who do the hardest and often thankless jobs – the jobs which are often taken for granted.
I will say more about all of this. But, let me signal now that I am not going to argue that the only ones who suffer within companies are the ones who do the hardest physical labor.
I now digress into a story that will both build upon what I have been saying and prepare the ground for some more ideas I want to plant.
When I owned an employee ownership investment bank, we did four transactions for Union Carbide. Some of you will remember Union Carbide as a big chemical company that was bought by Dow Chemical a number of years ago. There are also two audience members with us tonight from India, they and others of you will remember that Union Carbide operated a plant in Bhopal, India. On the night of the 2nd of December 1984, over 35 tons of toxic gases leaked from Union Carbide’s pesticide plant located there.
Over the next few hours, at least 2,000 people in the surrounding community died as they breathed the gases. The official death count is 2,259. Union Carbide paid death benefits that would lead an observer to think that perhaps 3,787 people died. Some people believe that many more were killed. It is accepted, though, that 100,000’s of thousands of individuals’ lives were influenced terribly.
After Union Carbide tried to raise cash, to address the myriad of issues they faced, by selling businesses to various players, including managers, they reassessed the situation. One of the factors that made them reconsider selling more businesses as they had was that some managers sold the companies they had bought almost immediately after buying them, for large whole number multiples over what they had paid.
Understandably, Union Carbide did not feel good about this. So, they brought in my small company to evaluate this situation and propose some options. We ended up helping the employees buy four operations related to Union Carbide. All told, these transactions were worth the majority of the total dollar amount of employee buyouts that Hoffmire & Associates put together, which was approximately $2.2 billion.
What I want to tell you next is the story of one of the final steps we took in closing the smallest of the employee ownership transactions for Union Carbide. This one was at IWECO, a packaged gas distributor in Houston that served all of South Texas.
When I say packaged gas, think of everything from the helium delivered to blow up balloons, to acetylene for welding, to the types of medical gases used by doctors and dentists.
Transport yourself now to a warehouse in the south of Houston. Imagine more than 100 employees of the company gathering from across the region, on their own time, to discuss buying the company they worked for. I won’t go into the details of the transaction. But, I will go into one particular. It was at least 90 degrees Fahrenheit, over 32 degrees Celsius, with humidity in the low 80’s in the late afternoon and early evening when we met. And that was outside. In the warehouse, it was worse.
For three hours I stood on some crates, that acted as a stage, with the company CEO by my side. We spoke with the prospective employee owners, who sat in metal seats. I thought we had given all of the information we could communicate, and we had taken all of the questions that everyone had.
But then something odd happened. I had noticed throughout the meeting that a person in the front row had a twitchy arm. I say twitchy because you could notice that she was trying to raise her hand to ask a question. But, each time, the hand would raise a few inches, and it would then instantly go back down. I didn’t recognize her well enough to call upon her. I did not want to make her feel uncomfortable.
Just for your information, I have told this story a number of times, and each time I do, I change the person’s name who had the twitchy hand. I feel that it is her story to tell. So, I try to not violate her privacy, although, at some level, I understand that I am.
In any case, as we were thanking everyone for coming to the meeting, after having reached a favorable set of conclusions, up went Maria’s hand. I quickly called on her and looked forward to answering her question.
As I mentioned, she was in the front row, and to my surprise, and I am sure to the amazement of everyone else in the warehouse, rather addressing me or the CEO, she turned around and faced the audience of potential employee owners. She stood there for a few seconds and absolutely everyone wondered what would happen next. And then Maria spoke. Her words were these: For generations, no one in my family has owned anything but a few old cars. If we are going to own this company together, I want you to know who I am. My name is Maria. Maria then sat down, and instantly everyone else stood up and gave her, and later I realized they actually gave themselves, a sustained standing ovation – with more noise than that warehouse had ever heard.
For me, over my entire career working in the employee ownership community – involvement that started when I was 18 years old, I have never heard a more important statement. Those 30 words encapsulated a philosophy that was very sophisticated. When Maria was done speaking, no one just had hope they understood her. No one just had belief that they understood Maria. Everyone could say: I know what Maria was saying. I, …personally…, knew exactly what Maria was communicating. Although, today I would quibble whether “know” is the correct word.
She expressed the feelings of a person who came from a family that had never owned a home. She spoke of wanting to be known. But she did not want to be known just as an individual but as a person who was part of a group, a community of employee owners that was together – united in a cause.
So, in this case, people had an experience of that they felt was profound. When I say profound, what do I mean? It might sound as if I am exaggerating. But I felt later, as I thought of the moments after Maria sat down, that the audience was saying collectively – their standing ovation – that they wanted to exist in a new, and perhaps better way, and be something more. They also wanted to acknowledge and feel to some degree the depravation that another family, Maria’s family, had experienced.
So, here we have a statement of philosophical importance that is in rhythm with the main tenets held by my friends who study existentialism and phenomenology. Those tenets are: 1) that everyone in a good community stands together through good times and bad; and 2) that community is built through experiencing collective loss and benefit.
Let me now build more around how science is used in the employee ownership field.
In the science bucket, I would put valuation and the laws regarding employee ownership. While all of us who understand a little bit about valuation would acknowledge there is some art to appraising companies, in the end, there are established methods that rely upon discounted cash flows, comparable company valuations, and asset values. Similarly, while lawyers and others have been able to work with regulators to interpret laws, the process by which employee ownership is governed is significantly rule-based and somewhat knowable.
You can see that, among my three classes of experience of ideas, I am putting valuation in the category of things we can know. These are not belief-oriented topics. Nor are they constructs that we hope about.
On the other hand, there are parts of employee ownership practice which are based on beliefs. This may sound controversial. But one of the beliefs is that owners sell to employees directly or through trusts and other means in ways that most of us understand. I am not saying that we don’t understand that money changes hands. It is not that I am saying that owners are irrational. They aren’t irrational.
I am saying that owners do not completely understand all of the influences that come together when they decide to sell a company to employees or an employee trust.
Let give you some reasons that owners sell their businesses’ shares to employees and into employee ownership structures. One is that they want to honor and compensate the people who helped them to build their businesses. Another is that there may be no other natural buyer who will pay a fair price. Still another is that owners know what certain types of outside buyers will do. Especially in small towns, owners may sell to employees because the owners know that strategic buyers and private equity players may fire many people at companies as merger integration takes place. In small towns, these employees could very well be neighbors of the people who sell their businesses.
Other reasons may focus on simply the need for owners to gain liquidity on their own schedules. Perhaps they love tax advantages so much that they want to take advantage of tax breaks that are available when employee ownership is brought about. Or perhaps owners want to guarantee themselves a job as part of their exiting from ownership of their companies. All of these are logical reasons.
This next point is very important and not well-understood. So, I am going to say it twice. In many employee ownership transactions, selling owners do not completely understand that they could have kept their companies and received the cash flow that is used to pay for the company as the employees’ shares are bought. So, here I go again. In many employee ownership transactions, selling owners do not completely understand that they could have kept their companies and received the cash flow that is used to pay for the company as the employees’ shares are bought.
What I am saying is that selling owners don’t often act on knowledge (or knowing) that the traditional business world acts upon every day. I am saying that many selling shareholders believe in what they are doing to such a great degree that they are willing to set aside traditional norms so that they can support their employees.
When selling shareholders do this, they are making a philosophical statement. They are saying I want to further build a community this time that shares both the upsides and the risks of ownership. They are saying, in some cases, that we, as founders, are even willing to lend money to the employee ownership company that they want to co-create. They are also saying that “we trust the potential employee owners enough to be their partners”.
I cannot look inside the brains of selling shareholders. But I feel that when they sell to employees and employee trusts, they are often not working on what they know. They are working off what they believe and, in some cases, what they hope. They believe in a better future for their employees. They have hope that the generations that follow the first employee owner in a family might be able to own their own home someday. Some sellers into employee ownership even believe that, someday, every business might be employee-owned.
This combination of believing in and hoping for particular outcomes leads to a fascinating situation in employee ownership. In the same way that, after Maria had stood up and spoke at the warehouse, the potential employee owners knew they were heading in the right direction, in fact, selling shareholders into employee ownership often feel as if they know that they are heading in the right general direction when they make their employees into owners.
This is not to say that all selling shareholders feel this way about employee ownership transactions and the aftermaths. Some wish that all the employee owners would appreciate their shares. Others are surprised that behaviors of employee owners do not change more quickly and more dramatically as employees become owners.
But, overall, most sellers into employee ownership will tell you that they know that they have done the right thing – even if they cannot say all of the reasons and understand all of the complications of their transactions. You can tell I am adhering to my definitions to an unreasonable degree. But I would say that such sellers can only believe they are doing the right thing.
So, while sellers shareholders may not know everything, they say they know the most important thing which is that they are directionally correct.
You can tell, I am hedging. While I am saying that selling shareholders say they know they have done the right thing, I am also saying that the best they can do is believe they have done right.
So, you can see, I am making a case for accepting that not everything about employee ownership should work on the basis of knowledge or full-knowing. I am arguing that many sellers are doing the right thing for the world and as they sold their companies to employees – usually using the cash flow that the owners could have kept for themselves.
Let me be clear, it is an incredibly generous thing for selling shareowners to allow the employees to use the company cash flow to buy the companies when that same cash would have gone to the potential selling shareholders who decide to keep their companies. And just so I do not confuse you, this is different than when an outside buyer uses the cash flow to pay for a company. It is different because in most employee buyouts, selling shareholders are still bound, financially, to their companies for many years after the employees become owners. While in a traditional buyout, only a small minority of transactions are financed by the sellers.
Why do I go into detail on this point? It is because, when selling shareholders do an incredibly generous thing, they should not to be regulated to the nth degree. Instead regulators should be constantly aware that sellers into employee ownership are already doing a magnanimous thing. And the regulators should remind themselves daily that the few crooks they catch are not worth killing a goose that is laying golden eggs for generations to come that may never be owners if regulators kill the geese.
All of this relates to why I have been using the words know, believe, and hope throughout this talk. Regulators usually want to know what they are doing is right. They can do this in a scientific area such as valuation. And they can pretend to do this when they create laws that govern individuals’ behavior. But, unless there is an understood philosophy that underpins the laws and regulations, no one will be incredibly successful at creating an employee ownership ecosystem that acknowledges the incredibly generous acts that most sellers are making when they sell to employee owners.
Instead, regulators must understand, appreciate, and legislate or set rules in ways that support the philosophy that motivates most sellers to make sales of businesses to employees. And by doing this lawmakers and regulators build rather than restrict a process that is inherently generous.
I have one more topic I want to cover. Employee ownership is often thought of as being about sharing the upside. But it is really about more than sharing the upside. Employee ownership is also about preparing employee owners to prevent bad things from happening to the companies and colleagues. This is why open book management is so important. Open book management, where company financials are shared with all employee owners gives everyone at an employee ownership company the language to talk about corporate success and corporate suffering.
I am really going to go out on a limb now. I believe that when we give everyone a common language around financial, strategic and operational issues, we break down social classes. The blue collar worker can understand why managers lose sleep.
The middle managers who historically loved having power over employees can come to appreciate the knowledge and the brains of the workers.
Employee ownership actually allows acknowledging the dignity of all employee owners.
The Oxford English Dictionary defines dignity as: “The state or quality of being worthy of honour or respect”
I think when dignity is acknowledged, both the acknowledger and the acknowledged benefit dramatically.
I said early in my talk that I would not classify the only people who suffer as being those who have to do burdensome work.
I grew up in one the wealthiest parts of the world. Don’t get me wrong, because my dad declared bankruptcy three times and both he and my mother died with very little. But I learned a great deal about the rich by living were I grew up just north of San Francisco’s Golden Gate Bridge.
One of the experiences I had was that I was able to know by the time I was 27 years of age a total of 27 who took their own lives. Many of these people were managers, sons of managers, and people of wealth.
Many of them had lost the ability to see and honor the dignity of others. I actually believe that if they had a structure like employee ownership (which supports dignity) in their lives, many of them might have survived…………..
Finally, you have notice that I have not talked about hope very much. Here’s what I hope, I hope for greater international understanding. I hope for more employee ownership. I hope for better regulation and law-making around employee ownership. And I hope that all of us stay friends for a very long time.
So, what are the morals of my talk:
The first morale is that regulators and lawmakers need to understand that many good sellers of shares to employees and employee trusts are doing so while they are being very generous, and in some cases they, the sellers, do not even know how generous they are being.
The second moral is that regulators need to know that if they change the equations related to cost and benefits to selling shareholders, they could kill the geese that lay golden eggs.
The third moral is that we all have beliefs and hopes. These beliefs and hopes can be incredibly important. Often, our beliefs and hopes can lead us (or in this case, the sellers of businesses to employees) to do incredibly generous things. And just because we cannot completely understand or do not know why we (or sellers to employees) are behaving in generous ways, does not mean that regulators should mess around with employee ownership rules and do incredible harm.
The fourth and ultimate moral is that we ought to listen more to the voices of people who hope and trust because they are very often directionally correct and deserve our attention in policy, regulation, and employee ownership law.
I have one more hope. I hope that all of you come back to Oxford to see us soon.
Thank you!
John Hoffmire
