KKR’s Pete Stavros Discusses the Power of Employee Ownership

Will Colegrove:         All right, let's get started. Thank you everyone for being here with us this evening. This is a conversation we're very excited about, Employee Ownership Fireside Chat with Pete Stavros and Mary Josephs. This event is sponsored by the Rustandy Center for Social Sector Innovation at Chicago Booth, alongside two of our Chicago Booth student groups, the Booth Impact Investing Group and the Booth Social Impact Group.

My name is Will Colegrove. I am the Director of the Edwardson Social Entrepreneurship Program at the Rustandy Center for Social Sector Innovation. In that role, I lead the center's social entrepreneurship and impact investing programs.

Just a couple of quick words about the center: The Rustandy Center is Chicago Booth's social impact hub, and this year, we're thrilled that we're going to be celebrating our 10th anniversary as the impact hub at Chicago Booth. We are seeking to be the home for people committed to solving complex social and environmental problems. We're proud to be part of the University of Chicago's social impact and entrepreneurship ecosystems and our hope is that by promoting innovation, advancing faculty-driven social impact research, launching social ventures, developing meaningful programming for our students, alumni and the sector, facilitating social impact courses and convening thought leaders and practitioners like those we brought out tonight, the center can develop the people and practices that can accelerate social change.

Tonight, we're very excited to be having this conversation about employee ownership. And really, we see this as part of a new area of impact investing programming for us as a center. When many people think of impact investing, they oftentimes think about early-stage companies with a dual mission of profit and purpose. Oftentimes, that impact is linked to the product or service itself. However, we believe that impact investing is much broader than that and that the tools of finance can be a force for good across asset classes and business types. So if you really want to solve the world's biggest problems, we need an all-the-above approach to rethinking the role of business and capital in our society. And to that end, one way to think about creating a more equitable society is by giving workers a share of the value they create. As we'll hear tonight, this is not only good for employees, it's also good business and it can drive long-term value creation.

We're very lucky tonight to have two fantastic speakers who really are leaders in this space of employee ownership, KKR's Pete Stavros and Verit Advisors' Mary Josephs. You'll hear a bit of an introduction of Pete and Mary in a moment, but I just want to note that Pete, in addition to his role at KKR, is also the founder and chairman of Ownership Works, a nonprofit organization partnering with business leaders that has a goal of creating 20 billion dollars of wealth for workers in the next 10 years. Moderating tonight's discussion will be Mary Josephs, a Booth alum, who is founder and CEO of Verit Advisors. I also just want to give a special shout-out again to our two student groups who are co-sponsoring tonight's events, Booth Impact Investing and Booth Social Impact. The students sourced the speakers for tonight's event and have been fantastic partners in planning and strategizing on this program. We really would not be here without them. So I just want to say thank you again.

 A few just housekeeping notes before I turn things over to our students, we're going to take questions from the audience using the Q&A feature on the webinar. So please use the Q&A function on the bottom of your Zoom panel to ask questions and we will circulate those to our speakers towards the end of the event. We're going to save our audience questions for later in the conversation, but please do populate those as they come up and we will pass those on to our moderator as we receive them.

And with that, I'm going to turn things over to one of our student group leaders, Michael Zimmer, who will tell you a little bit more about BSI and Booth Impact Investing.

Michael Zimmer:       Thanks so much, Will. As Will said, I'm Michael Zimmer, a co-chair of Booth Social Impact and member of Booth Impact Investing, the two student orgs that worked to bring you this event with the great folks at Rustandy and a terrific Booth alum, Mary Josephs, who you'll meet in a moment.

But I'm going to share briefly about our organizations. Booth Social Impact provides a home for part-time MBA students who want to make a positive impact in their communities. We help to organize educational events like this one and run two popular programs designed to give students hands-on experience in the social sector. Our pro-bono consulting program, which matches small teams of Booth students with local nonprofits to deliver business consulting services. Each team works to help their nonprofits tackle strategic issues and overcome business challenges. And our group philanthropy initiative, which selects an important social issue each year, raises money and then invites nonprofits in the space to apply for a grant. Students perform diligence and select the winners. Now, Booth Impact Investing is an inclusive community of Booth students, alumni and investors that are passionate about impact investing in its potential to fundamentally reshape finance.

In addition to providing students' educational programming and community building opportunities, Booth Impact Investing manages the Steven Tarrson Impact Investment Fund, one of the largest student-run impact investing funds in the country. The fund enables students to source, assess and invest in ventures, creating impact across a variety of domains, including sustainability, education, economic opportunity and health equity.

So fellow MBA students, full-time, part-time and executives, if you're not yet involved with Booth Impact Investing or Booth Social Impact, I encourage you to visit our club's Booth group page to learn more. We'll share links in the chat. Please feel free to contact any of the group's co-chairs directly for more information. And both clubs also work with alumni and other impact-minded practitioners. So if you're interested in learning more about how you might engage with us and we might work together,please complete the form we're about to link to in the chat, we'd be thrilled to hear from you.

Thank you, everyone, so much for being here. I'm going to pass this off to my talented colleague, Jen Bao.

Jen Bao:                     Thank you, Michael. My name is Jen Bao. I'm a current Booth student. It is my great honor to introduce my role model and one of the most inspirational women in finance, Mary Josephs. She is the founder and CEO of Verity Advisors, the leading boutique investment bank. She is a proud Booth alum and one of the most recognized names in the ESOPs world. She has closed over 300 deals for ownership tradition and had been recognized as the Top 25 Most Influential Women in Mid-Market M&A for multiple years. I'm excited for Mary to share the wisdom of employee ownership with the Booth community. And with that, I'll turn over to Mary to lead the conversation.

Mary Josephs:          Thanks, Jen, a pleasure. This is a proud evening for me. When I attended Booth back in '85 to '90, not certain of where my career would focus, certainly the skills, tools, developed strategies and connections I made had a strong influence in a woman who was smart at math and finance could forge a career that makes such an incredible difference.

Today is an incredible pleasure to be able to moderate a conversation with Pete Stavros. Pete's an inspiration to me, taking the influence he has in his position at KKR and really lean into making a difference.

I'm anxious to hear from you, Pete, on how you were that person who said, let's do this differently when the formula was working. And to me, that's a classic Booth question, right? Or MBA question. And you did it with strategy, you did it with purpose and you did it with a process and measuring and evaluating and analyzing to be able to provide the data to be able to convince other investors and companies and persuade them into the power of employee ownership. And you've done a great service to employee ownership. So there's no better way to describe employee ownership and what Pete's doing than to start with a video of one of the early success stories from his initiatives and leadership at KKR.

Video:                         Imagine you wake up on a random Wednesday in the middle of your life and everything that you've ever wanted to do in your life, you can do now. All because you came to work and you did things the right way and someone held up their word to you.

-All right, this is a little different than when we normally get together. Anybody want to have an owners meeting?

(crowd cheers)

- We do have some news to share and the news is we found a new owner for the business.

- Pete Stavros is here. He is the co-head of the private equity firm, KKR.

-I mean, the performance of the company and the growth in value was astonishing. This is beyond our wildest dreams in terms of how well this business performed.It is huge collection of lots of little things that the workforce did. Again, they did it, they earned it,made this company more than triple, almost four-X their profits. And so, shouldn't everyone participate? That's the simple philosophy.

-So logical question would be, what does this mean for you financially 'cause you're all owners in this business? You guys ready to get into it?

-Yeah!

(crowd cheers)

-Even our newest colleagues are going to get a meaningful payout of $20,000.

(crowd cheers)

-Well, if you think that was good, hold on to your hats. If you joined last year, the payout is $40,000.

(crowd cheers)

So for this cohort, the payout is one and a half times annual pay. So the average payout is $70,000 for this cohort.

(crowd cheers)

-I was shocked. I was standing next to my nephew who just started, remember looking at him and hugging him and…

-This is two and a half times your annual pay.

(crowd cheers)

Three and a half times, four and a half times, five and a half times your annual pay. For this last group, the payout is six and a half times.

(crowd cheers)

-It's truly emotional. I've never seen anything like that in my life.

-The excitement, the tears, the goosebumps, just shear excitement. Everybody was in shock, honestly.

-First thing is, we're pre-paying for financial coaching for everyone. We want to make sure that you guys understand your payout, understand your tax situation, you know how to invest the money and it gets put to the best use possible.

-Still can't believe it. I mean, but it's good to know that if you work for a good company and put your time in, they do help you out as well.

-Where else are you seeing this many men and women hugging, shaking, crying, sharing stories of how we started out here, what we do every day coming into this company and try to make it better for everybody?

-It brings the extra oomph to every person that works, knowing that they're owners. The workmanship, we see everything's going up. Other companies need to do with this.

-Every cent that we get back, we earned.

-I've never had anything like this happen to me in my entire life. This is life changing for everything.

-I wish that every company could see what this has done.

-Every dream that I've ever had in my life, I can do now. It doesn't just change a life, it's going to change the whole community.

(gentle music)

Mary Josephs:          I've seen that video before and it never gets old. The privilege to take the expertise in corporate finance and capital market and make such an impact to how people feel about their work, how people feel about their communities, reinvesting in invigorating companies, it's extraordinary.

So, Pete, I have a question. If we look at your resume, what sparked your curiosity and passion for employee ownership?

Pete Stavros:             Well, it was really my dad. So I grew up in Chicago, in Arlington Heights. My dad was a construction worker. He operated a road grader for 40, 45 years with a small union shop. As I always say, he did not begrudge being a construction worker. He actually loved his job, loved being outdoors. If you were to meet him, he's kind of a stereotypical construction worker, huge guy, tan all the time, loves working with his hands, but what he did not love was two things. One, he felt like he couldn't get ahead on $15 an hour, couldn't build wealth for himself and his family.

And then the second thing was just the lack of incentive alignment. If you earn an hourly wage and that's the only way you're compensated, it is the perfect misalignment of incentives because you want more hours and your employer wants fewer hours. So all the conflict and the strikes that my dad lived through were all around hours. And he would always be very careful to explain to my sister and I how screwed up the system was. Why would we be fighting over hours as opposed to focusing on productivity, doing the job on time, on budget, to high quality? There was no incentive.

So he always dreamt of profit sharing and he talked all the time about, isn't there some way the union could be aligned with the company, as opposed to fighting over hours, which is pretty silly? So that's where my interest originally came from. And then, my folks didn't go to college, so I didn't have a...I had a career path to Wall Street. I ended up getting one job out of college, happened to be on Wall Street, and then I happened to start at an investing firm. And the first thing I worked on was an ESOP, which you're obviously a world-leading expert in. But I worked on a deal called Gleason Corporation that used to be 100% ESOP and then was public and it was still a partial ESOP. And they had run into some liquidity constraints and wanted to basically cash out the ESOP and take the company private. So that was really, I'd say, from my dad and my upbringing and then I happened to stumble across this idea of an ESOP.

 

Mary Josephs:          That's so interesting. How did you transform that into an investment strategy?

Pete Stavros:             So, if you fast forward to when I got into a leadership role at KKR maybe 15 years ago, then, at that point, we were actively thinking about or I was actively thinking about how could we apply broad-based ownership models outside of an ESOP structure?

ESOPs are awesome, but they don't fit every situation. And so, I was actively working on and had been actively working on ever since I went to business school, I did all of my optional work where I could write papers for a course, was all on employee ownership and ESOPs and are there other ways of doing this that would work in a large scale context.

So I started experimenting with this at KKR about maybe 12 years ago. And then we developed this model over time. We've now done this about 30 different times. And the model has a lot more to do with what you pile on top of ownership. So the stock ownership is the foundation, but what really moves the needle on culture and engagement and how everyone feels about their role at the company has much more to do with how we amplify the voice of the worker in the company, how people get a voice over what they do every day. What we do with employee input and employee engagement surveys, what information we share with workers. So financial information, the business plan, where we're headed, what metrics are important, how can they help us move those metrics?

It's all of that stuff taken together that over years and that's one of the challenges as you know, is this is a multi, multi-year journey, but over a long period of time can drive down the propensity to quit and drive up employee engagement scores, and therefore corporate performance.

Mary Josephs:           So it's always easier to extrapolate straight lines, right? And KKR had a pretty good business model going, an excellent business model and very well respected and revered on Wall Street. How did that go down, trying to say, I'd like to do it differently? And to do it differently, you had to introduce that dreaded D word of dilution. So it's not often private equity firm wants less, right?

Pete Stavros:             Well the truth is, to be honest, I didn't ask anyone. I just started doing it.

Mary Josephs:           So lesson number one is ask for forgiveness, not permission.

Pete Stavros:             Yeah, particularly when you don't know what you're doing and you're making it up along the way. So, I didn't really know where it was going to lead and how we were going to make it work. I just thought if we had a different way of doing this where… Even today, we walk into companies we look at that have a 60% turnover rate. How stupid is that? A company rehiring 60% of their workforce every year. Some distributors and retailers have 100%, Amazon probably has 150%. It's just not good for human beings and people, it's not good for companies.

So, the leap of faith was could you get people to understand equity, value it. Particularly working-class folks like my parents, when you're focused on your this week, this month, and this cannot be a substitute for wages. You need to be paying fair wages to begin with.But on top of that, could you have this alignment tool and then pair it with all this communication I mentioned earlier and get people engaged in a different kind of way. So I guess that was the leap of faith that we could do that.

Mary Josephs:           There's a big challenge in the ESOP community and I want to underscore that that's just a subset of the menu of opportunities for employee ownership.But there's a kind of mindset that we put the ESOP in and people are going to understand it.There is a tremendous investment of leadership time and management time and consistency in messaging and coaching. Can you describe that? I mean, that takes time and money.

Pete Stavros:             For sure. You roll out an ownership plan day-one and a good number of people don't understand it and then a good number of people don't believe it. So, am I really going to have this kind of an opportunity if the company performs… A lot of folks don't have much of an interest in corporate finance and for what we're doing, we're often doing options and levered capital structures. So these are complicated topics.

And so, the way we do it is, at the outset, we do our best to be very clear in communication. We make it clear this is not risk for the workforce, this is a free incremental benefit. It's not a trade off for a 401(k) match or wages or wage increases. And then we try very hard to explain exactly what it is, how it works. And then, it's, you mentioned, a long process. So it's quarterly all-owner meetings, which includes all employees. It's, as I mentioned earlier, dissecting the business plan.

So in this CHI Overhead Doors example, which is an Illinois company by the way, near the University of Illinois in Arthur, it was all about, okay, there's this huge scrap opportunity. We've got too much scrap in the plant. If we hit our goals on scrap reduction, it could be X million dollars of profit. That goal, here's how we break it down by shift, by line.

And then, it's all about giving the workforce data to know how they're doing and how they can improve. And then, we would pair long-term incentives of equity with shorter term incentives like, if you hit your scrap goals this week, we buy your lunch next week. And then this idea of worker voice, which encompasses a lot of different things ranging from Kaizen, which we borrowed from Toyota, I'm sure people on this Zoom have studied or are aware of. That's really all about pushing decision making to the frontline workforce and then delegating bigger decisions. We put a million dollars aside every year at the plant that you just saw on that video and the workforce decided where it went.

So we said we're not looking for ideas on faster machines to buy, we're looking for ideas on how to enhance the workplace. So people initially said air conditioning would be nice 'cause it gets hot in the summer, so we air conditioned the plant. Then they wanted an on-site cafeteria with healthy food options, which we built. They wanted an on-site health clinic, new break rooms, et cetera. And so, the cumulative impact over that kind of an effort over we held the business for seven and a half years, things really change. You go from 30% of people even bothering to respond to an employee engagement survey to getting to 80, 90% and the score is being meaningfully higher and people being a lot less likely to quit.

 

Mary Josephs:           There's a story I've heard you tell about traveling one day on one of your portfolio companies with a truck driver and kind of asking. I think that would be super interesting to share.

Pete Stavros:             So that's this same company. The company CHI Overhead Doors, which makes garage doors like you saw in that video. We don't own it anymore, it's now owned by Nucor, but the company employs its own drivers and owns or leases its own trucks and trailers. And part of Kaizen, this Toyota idea of continuous improvement, is that the leadership needs to be deeply involved in the business. So that extends to, I was the chair of the board, that extends to me,extends to the leadership team. So I would participate in Kaizen events in the planton how we could load our doors into trucks more safely and effectively, how we can improve packaging to reduce damage. And then to understand logistics and freight efficiency and cost, you need to spend time with the drivers.

And so, I got to know one of the drivers and spent some time with him on his route.And the story you're referring to is one day, he basically said, before I was an owner in the business, I was kind of like an hourly employee. I wasn't actually paid by the hour, but I was paid by the mile. I think it was 40 cents a mile and $20 flat fee per delivery. He said, "So really I don't really care about the efficiency of my route. You could have me drive in circles, it's 40 cents a mile, doesn't matter to me. But, now that I'm an owner, I care. And so, when I see the company send me way off of my route to deliver one door, I know how much you are paying me per mile, I know how far we're driving. And then, the $20 flat delivery fee, I know we're not making money 'cause I know what the door sells for."

So he ended up tipping us off to a problem with our route scheduling department, which was with the best of intentions, we were overriding our own route scheduling software to accommodate small orders. It was coming from a place of wanting to deliver great service, but it was a poor business decision and we were not aware of it.

But you really need to have the entirety of the workforce engaged, understanding where we're heading, how they can help, voicing these ideas and observations if you're really going to unleash the full potential of a company.

Mary Josephs:           I want to - thank you -I want to stick a little bit on leading through influence. It's one of the thingsI really admire a lot about you, Pete, watching you because there's so many people you have to influence to actualize and realize what your vision is for increasing broad-based ownership, and not the least of which is investors, your investors and the investor community in Wall Street. Again, back to a preference to extrapolate straight lines. So can you talk a little bit about that, how you got your investors and then your peer group of larger private equity firms to align with your vision?

 

Pete Stavros:             I think we've tried to influence by talking about performance. So it's not just, this is not just about workers, it's about better cultures and more sustainable and more valuable companies. So we share information and data on what happens to the quit rate at these companies, what happens to employee engagement scores, what happens to productivity.

So in this example of CHI Overhead Doors, it was not just scrap production, but it was labor productivity procurement and purchasing improvements. It was freight and logistics efficiency. It was reducing network and capital. There were a lot of little things, as I said in that video, that made this a big home run over time. So we lead with data and information and performance. And then on the worker side, we really try to humanize the work with these videos. That is what grabs people more than me droning on about the data.

A lot of the people who have approached me over the years saying, "Hey, we'd like to do this or we'd like to try it. Can we understand more about it?" It's usually they've seen a video of these, whether it's a dividend or an ultimate payout event where they say, "That's something I'd like to do with our employees.”

Mary Josephs:           Well, congratulations. Can you talk a little bit about your approach to employee ownership or where you see sort of this broad-based model that KKR is investing in alongside other models of employee ownership? There's a lot of ways to do it.

Pete Stavros:             Exactly, there's co-ops and ESOPs and what we do. I mean, there's a million different ways you could do it. As I said at the beginning, the ownership, it's counterintuitively not the most important thing. I think it's important, it's a foundation, but if you just do ownership, then it's really a compensation discussion. And so, you're not going to get at people feeling trusted, respected, heard like their voice matters. It's all this other stuff that really makes people feel differently about their jobs and about the company that they work for.

So whether it's an ESOP or what we do, that's like a corporate finance tool. I mean, that's not the heart of this. The heart of this is what you do with ownership.

Mary Josephs:           Agreed. Can you share with us a story of why you came to start Ownership Works?

Pete Stavros:             So Ownership Works is a nonprofit foundation that is supported by, at this point, maybe 65 different organizations. We haven't added more partners, but we'll be adding more next year. So we'll be probably closer to 100 organizations. And this includes pension funds, banks like Goldman Sachs, Morgan Stanley, investors like TPG and KKR and many others. Labor leaders, nonprofit foundations like Ford and Rockefeller. So it's this cross-section of the economy and of society of leaders from different stripes all saying this is important.

This is worth real effort to figure out how to do this well 'cause as you know, it's hard. This takes a lot of years. It's about culture change, it's an investment and it doesn't always work, by the way. I've never seen it be a disaster like it hurts the company, but if you don't have the right leadership in place and they're not doing all the hard work that we've talked about so far in this call, it's not going to move the culture. It's not going to move the quit rate and engagement scores and performance.So the idea around Ownership Works is this is very hard. So we want to help and be a practical resource for companies who want to go down this journey.

So how do you structure and implement these plans and programs? How do you communicate them? How do you educate the workforce financially and in their own personal financial situation? So how can we do financial literacy training?

Two-thirds of Americans, according to the government, are financially illiterate and this is a real opening to have a conversation about saving, planning, budgeting, et cetera. So there's this whole practical side of it. And then by the way, as I mentioned, how do you leverage ownership into a different kind of culture? So we have a huge amount of work that we've done with many groups, including McKinsey, on how to do that well.

And then the second part of Ownership Works is how to build the movement. How can we get, we said 20 billion of wealth for low income workers? I think we should be in a path to get 20 billion just at KKR 'cause we're going to do this everywhere and we have 800,000 employees. So when you add up KKR, TPG, Warburg Pincus, Berkshire, Leonard Green, all of these firms have hundreds of thousands of workers. And that's where you could start to get into enormous numbers that could literally move the needle on wealth in the more blue collar side of the economy.

Mary Josephs:           Sounds like an important tool in addressing the income inequality.

Pete Stavros:             Yes, it's an important tool in building wealth at the bottom of the economic ladder. Now you could argue, if this is done well, the people at the top do even better because at that garage door company, we made 10 times their money. Who would've thought you could do that with a garage door company, which by the way had been owned by private equity three times before us?

So this had been owned by smart people for 20 years, but it was really the unleashing of all of this kind of culture that led us to do more than three times better than we ever dreamt we would do with a garage door manufacturer. So it does build wealth at the bottom. I'm always a little bit careful on wealth inequality because our senior leadership team obviously did very well too. So for us it's about building wealth at the bottom, trying to address low levels of employee engagement.

If you listen to Gallup, 70% of Americans basically don't like their job. It's about addressing racial and gender equity. If you push ownership deep into a company, you do unfortunately disproportionately benefit people of color and women. And then this financial literacy idea, can you use stock ownership and giving people access to an appreciating asset as a way to start this conversation around financial education?

 

Mary Josephs:           Congratulations on the success of Overhead Door and your initiatives. Now one of the things I hear all the time is people know what M&A is and they know what private equity is. And then through lenders, they know what a dividend recap is. The competition, if you will, or the hurdle is they don't understand employee ownership or they don't know what it is. Do you find that the model is more effective in certain industries than others? And if so, what?

Pete Stavros:             So we started this in manufacturing in industrials, which is the group that I used to run at the firm. And I used to say industrials had the best opportunity for employee ownership because sometimes as much as 80% of the workforce earns an hourly wage, has levels of engagement, high quit rate. And yet, that contingent of the workforce, which is most of the people, they are determining your quality on time delivery, how much scrap you have. Everything that matters, they're in control of and they're not happy.

So I used to say industrials and manufacturing had the greatest opportunity because there's just so much potential for improvement. Now the flip side is it's very complicated rolling this out in a manufacturing environment for a lot of reasons. One, the workforce is often very distributed. So when we roll this out at Ingersoll Rand, you're talking about 16,000 people in ED countries. That is the heavy, heavy lift. You're also starting with folks, again, like my parents who don't really have a lot of interest in finance maybe, have not owned stock before. So they're not coming to the table with a deep understanding of what the opportunity is.

 So if you compare it with a software company, maybe the negative of a software business in terms of opportunity here is there's a higher level of engagement to begin with, there's lower quit rate. There's not maybe so much upside from a culture perspective. Having said that, there are fewer people. They tend to be less globally distributed and more financially savvy and equity is just more a part of the culture.

So I think it's a trade off, I think this works anywhere. I think it is harder in companies with an enormous number of employees relative to the value out of the company. So if you think about a low-end retailer or service organization where you may have tens of thousands of workers and not a lot of profit, well that just means the equity value is not so great relative to the number of people. So how much can you really do for an individual worker from an equity perspective? And then, it's also a little bit easier when you have some stability in the workforce. If you're walking into a situation with 60, 70, 80% worker turnover and you start talking about five-year plans, you'll lose a good chunk of people right at the outset.

But the most important thing, and I would bold face and double underline this, is leadership. It's like anything in life and in the world, it all starts and stops with leadership. If you have the right people like we did at CHI Overhead Doors, this program can be unbelievably effective, employee ownership that is. And if you don't, it won't. It's like anything in business, it's all about leadership.

Mary Josephs:           In the ESOP sector, which is what I'm more familiar with, traditionally it was manufacturing industrial is the highest concentration of employee ownership. And that started to shift to construction and engineering and engineering being business services, they pay a lot of taxes. And more recently, business services, like legacy partnerships are looking at employee ownership to have it be broad-based versus just the partners, to again, to your point, engage more people, right? And to include more people in it. You need to attract and retain talent, so that the younger people see the paths and opportunity that the founding partners had.

What do you think… This is an unanswerable question, but you've put so much time and thought into this. I would love your perspective on it. What do you think some of the key barriers are to broader adaptation of employee ownership today?

Pete Stavros:             Well, I would say one key barrier is it's just so different from the way the system works today. So anytime you're talking about a radical change, the economy, the way it's rigged today is the top layer or two of an organization is where all the equity resides. And so, this is just such a departure from that and I think anytime you have a huge departure from the way the system works today, it's going to be hard.

I think relatedly, there is a lot of conventional wisdom out there that is workers will never understand this. Giving stock to workers, waste of time, they'll never get it. And if they don't understand it, they're not going to value it, which means the company won't get a return on it, it won't end up being retentive. And the truth is, this is really hard and we say that all the time to our CEOs and to people who are thinking of doing it. If you think you're going to roll this out and people are going to just stop quitting, it's not the case. You have to remember a lot of people, if they can get another dollar or two an hour across the street, they are in a financial situation where they may need to go do that and they're also probably coming to the table without a lot of trust. And so, believing that this is real is a leap. And then it's got to go, as I've said a number of times, together with all of these other things.

Ownership is a philosophy. It's not just, here's some stock, it's you're going to have a voice in your work. What you say is going to be, we're not always going to do everything you say, but it's going to be listened to and considered. Employee engagement scores are going to become a key metric that we're tracking the quit rate. When we do this well, board meetings start, page one, if it's relevant to that particular company worker's safety. Page two, engagement scores, page three, quit rate. And it may be a great quarter financially, but if those metrics aren't going in the right direction, we may never get to the financials.

So, yeah, I do think there's a lot of built-up momentum against this and a lot of belief, like I said, of people saying, "Ah, they'll never get it. It is too hard." And I think you got to acknowledge it is hard, but it's worth it if you're willing to put the time in.

Mary Josephs:           Thank you, we had a question along those lines from the group of attendees here on this and I really like this.

Lindsay, she's asking about how you communicate both the risks and benefits of ownership. And what I like about that question is sometimes, and you've touched on it at least in the ESOP space, there can be this entitlement.You gave stock and it's all going to be great and people are going to behave differently, but how do you communicate the risks as well as the benefits for those skeptical?

Pete Stavros:           And I want to underscore what I said earlier, it's really important that I'm clear that there is no risk to the worker. So in our model, this is incremental and it's free. So we don't allow people who make less than $100,000 to invest. Senior executives, we allow to invest out of pocket, but it's got to be free for more modestly compensated colleagues. It's got to be incremental, can't be a trade off for wage increases or benefits. And by the way, none of that would work.

As I said earlier, it's not like you give this out and people are going to value it because initially they're not going to understand it or believe it. But that's the most important thing to make sure I'm clear on, there is no risk to the worker in this. Now in terms of maybe something that has come up before, people will say, "Well, what if you roll out this program and the company doesn't do well?" So I get that people haven't invested their money, but wouldn't that be a bummer? I mean they were all excited about ownership and then the company's not performing and that happened.

 So we invested in an aerospace company in January of 2020, two months before COVID, the market imploded. The company did not perform and we had just rolled out this all employee ownership program. And basically, our philosophy is whatever you do for that senior leadership team to keep them engaged and motivated, meaning reprice their options or give them new options, whatever you need to do to retain and keep them engaged, you have to do for everyone.

So we basically repriced everyone's equity all the way through the organization. And that's, again, another core philosophy, is there's one class of stock here, there's one deal. If anything, the terms were always better for our more junior colleagues 'cause we don't have performance vesting in the stock. So anyway, the most important thing is there really is no financial risk to the junior colleagues in these companies.

Mary Josephs:           You have another really good question on your comment that this is one of many ways to increase employee wealth.

So it's why did you center on this strategy, which is the broad-based versus they're referring to Mosaic and A&H and what that is is a private equity firm coming in and doing structured equity and doing the 100% S-corp ESOP. So that's a really complicated question to unpack. I can unpack some of it, but I think a good starting point there is maybe Pete, where ESOPs don't work and then talk about the broad-based.

Pete Stavros:             Sure. And it sounds like whoever asked the question is pretty sophisticated around ESOPs. If you're really bored one night, you can find the paper I wrote at business school about the history of ESOPs and why has it become less common for larger scale companies and Mary and I talk about this all the time.

The majority of new ESOP conversions, if you look at A&H and again I've said this twice, I'm a big fan of ESOPs. Mary knows I've pitched, I don't know how many ESOPs in the years we've known each other. It's just less common at scale. So A&H, their investments are 100 workers, 150 workers. Mosaic, who I would say I'm not super steeped in their history, but I think they're kind of the biggest out there and their whole fund would be very, very small relative to the private equity capital, even just at one firm. So it's just not a scale strategy.

Now there's a lot of reasons for that. Some of them you can read about in that paper if you're really bored, but there are challenges particularly doing it at scale and they have to do with the way the law's written, how it leads to some conflict with the Department of Labor at times, redemption requirements and what that means for the liquidity of a company. The complexity of the transactions, Mary and I have worked on many and they take months to put into effect and a private equity transaction is, we bought CHI from start to finish in seven days. So the aggressiveness of the M&A market and the extent to which people are willing to really, really move fast to win an asset makes ESOPs harder, not impossible. And Mary's done, as we said at the outset, a gazillion of these, but today unfortunately, they're not as common at large scale and in larger scale private equity firms.

Mary Josephs:           The math is really hard in companies with higher multiple values. ESOPs are financed by debt and if a company's worth 15 times, 14 times as some of these larger scale companies are in a robust market, it's an infinity to be able to pay down all that debt and start driving equity value for the employee owners.

Pete Stavros:             That's a great point. My colleagues and I talk a lot about the fact that, again, remember in ESOP, this started in 1974 and there was just not the depth of capital markets, say there was not the depth of M&A market. And I think Congress did the best they could to put something forward that worked.

But in the context of today's M&A market, the risk reward of an ESOP does not sometimes make sense in the sense that just like Mary said, the workers have to have access to all the common equity and then you have regular way senior debt and then it's this subordinated debt that really finances the conversion. And that subordinated debt has unlimited downside.They can lose all their money and capped upside 'cause they're a structured security. That's really not the way the capital markets work today. That structured security in a regular way deal would have lots of equity ahead of them that would basically lose money before they do and that's not the way these ESOPs are set up. They're the first dollar to lose money and yet their upside's capped.

So probably more technical detail than people care to hear, but the risk reward in many cases can be a little bit out of whack relative to the way the capital markets are set up today.

Mary Josephs:           Will gives another question that actually segues really well to this and I think this is where you're going is, can you talk about broad-based opportunities for wealth creation that aren't impaired by ERISA, they're non-ERISA regulated broad-based ownership structures and that's really where you're taking a lot of leadership.

Pete Stavros:             And that's what we've been working on exactly. And we're still working on, I mean Mary and I are working on two or three ESOPs I think at any given moment. So it's not like we've given up, it's just harder at large scale in terms of the types of things that we do. Outside of an ERISA structure, the idea is simple. Whatever the equity is, whether it's restricted stock or options, you just share that with the entirety of the workforce. Now there's structural complications with that, which is one of the things we've been working through for 12 years.

How do you administer these broad plans that are sometimes global in nature? That's another challenge with ESOPs,is they're really, it's a domestic concept. And in 1974, we had a lot of big domestic companies. Today, 40% of S&P 500 revenue is overseas. So you think about having a global workforce and just a US ESOP, it's hard. It's another reason why you don't see as many at scale, the bigger scale companies tend to be global. So what we're doing is outside of that structure, just simply sharing whatever our equity incentive program is, sharing it with everyone.

Again, I don't want to go down a technical rabbit hole, but there's ways you can structure around some of the complexities of having lots of owners in a private business, how you can lessen the administrative burden, et cetera.

Mary Josephs:           I have a good question that might have been caused by me bringing up that D dilution word. So I want to revisit it for clarity and it's from Benjamin. So the dilution to shareholders. So the reason I used the word dilution and I think Pete, you don't think of it that way, but I shared it 'cause I think private equity could think of it that way. I mean unfortunately, there's only 100% equity to go around. That's the pie. I tried, we got fancy models, I can't get to 110% equity in a deal. So if you're giving something to someone else, the intuition is that there's less for you, right?

So Benjamin says I mentioned dilution. How much or what range of dilution should investors expect when implementing a plan like this?

Pete Stavros:             Okay, so a typical deal for us would have somewhere between 10 and 15% of the upside set aside for an incentive plan. So if we invest a billion dollars and we double our investor's money, that billion dollars, 10 to 15% of it, 100 million to 150 million would be set aside for incentives for the employees. Now a traditional private equity deal would be only for the top people. So that 100 to 150 million would be for the top couple of layers of an organization. What we do is, in all candor, we take a little bit away from the senior folks. So they may get five or 10% less than they would've gotten on a percentage basis. Again, we believe on a dollar basis, it will lead to them earning far more money with this structure, but on a percentage basis, they'll be down a little bit. And then our plan will be a little bit bigger to accommodate all the employees.

So as an example, let's say without broad-based ownership, we would've had a 12.12% incentive plan. We might take one or one and a half of those points away from folks who would've gotten it in the absence of a broad-based plan. And then we might make the 12, 13 or 13 and a half. So you free up three, maybe 4%, for all of the workers who would typically not participate.

So if you run a financial model on going from 12% incentive plan to 13, 13 and a half, even say 14, say 15, and run a five-year model or a 10-year model, the dilution is a rounding error. You're talking about 25, 30 basis points. This was the cover story for Private Equity International I think last month talking about this question of dilution. I spent time getting into the math of all of this with them. But the bottom line is you don't need to believe a lot to be able to broaden ownership to include everyone.

The break even in our math and I think the magazine wrote about this was like 1%. You got to find a 1%, one and a half percent, 2% uplift in EBITDA. And if you can't do that with all these incentives, you probably shouldn't be in this business. You should probably go do something else.

Mary Josephs:           We have a question from Connor that's really good. Thank you for participating, Pete. Connor's in an upper middle market private equity firm in the Midwest and says he remembers his grandfather, an iron worker, telling him about his attempts to organize labor-led buyouts, so it hits close to home for him.

Question is, will this work at non-mega cap funds?I really like the way you wrote this, Connor, 'cause this is a challenge in the ESOP world and I think we want to draw a distinction tonight between the ESOP world and the employee ownership world. The ESOP's a subset of it.

His question is, will this work at non-mega cap funds? The legal complexity requires high transaction costs and even if able to accomplish during your whole period, so that's one common objection or observation in ESOPs.

And then the second one that he brings up that I hear a lot is the challenges at exit if the next period and also if the next buyer isn't going to implement a similar program. So do you find your own investment team is also benefiting from reduced turnover from meaningful work?

That's the second part of the question, but the first one I like 'cause he throws in a quite a number of objections and challenges that we commonly see on the ESOP side. And I'm not saying it's easy on your side, Pete, but that I think your strategy addresses.

Pete Stavros:             Yeah, so there's way more… Let me say it the other way. There's way less transactional complexity in what we do than in an ESOP. So the frictional cost, the administrative burden, the legal and advisory cost of rolling this kind of a model out is far less. So yes, it works in the mid-market and if you look at the founding investment firms of Ownership Works, we have groups like Blue Wolf and Tailwind and Altamont and Arcline and these are all mid-market firms. We actually have a mid-market fund ourself, KKR, which we also do all employee ownership. So no, I think we've figured out a lot of the really vexing issues around how do you share ownership with all employees in a way that's not going to drown the leadership team in paperwork and is not going to create a whole bunch of extra cost.

At exit, if you think about it for a private equity firm, we're exiting in three ways. We're taking the company public. If we do that, it's easy because you crystallize everyone's equity and tradable shares and you can basically create a forever employee-owned business as long as the board is willing to have periodic issuances for new joiners, for acquisitions, et cetera.

So Ingersoll Rand would be a great example of that. So that's a public company you could invest in it. 16,000 employee owners in 80 countries and just about the best culture I would say in all of industrials. This took nine and a half years, but the quit rate went down 90% and the engagement scores went from the 19th percentile to the 91st. So a total transformation of the culture and that was successful, as I said earlier, 'cause the leadership. This guy, Vicente Reynal, and his team are incredible at this. So that's the IPO path. If we sell to another private equity firm, they are highly, highly unlikely to unravel this program and not continue it.

Just imagine we sell a company to another private equity firm and everything we've done around worker voice and ownership and sharing information, they just kill all of it. People are going to leave, it's going to destroy the culture. And I think a firm that didn't want to continue what we've started would not pay a market clearing price 'cause people pay more for these businesses, not less, because of the culture.

And then the hardest one is when you sell to a big corporate. So when we sold CHI Overhead Doors to Nucor as an example, Nucor's got, I don't know how many hundreds of thousands of employees, but a huge employee base. They couldn't turn upside down their whole approach to benefits and comp for this little acquisition that they were doing. I mean it was a 3 billion acquisition, but for them, it's little. So that's the hardest one, is getting a corporate to continue the program.

Now when we've exited these to corporates, like when we sold Capsugel to Lonza or Capital Safety to 3M, I would say these companies tend to find homes where the workforce is really well taken care of. Because again, the strategics that are attracted to these businesses are attracted to the culture and they don't want to destroy it.So Nucor, while they're not handing out stock ownership, they have a really robust and generous profit-sharing plan that they've implemented at CHI Overhead Doors and they've continued with… Nucor is one of the best in the world at safety. So, everything that we were doing around Kaizen safety worker voice is a part of their culture.

But anyway, to summarize, IPOs are easy, sales to other sponsors are easy, the toughest one is selling to a corporate.

Mary Josephs:           Thank you. Parker has a question that I might do a quick response to and then toss it to you.

Have you seen employee ownership work in retail or other businesses with a large base of customer-facing employees?

Parker, actually this is something that's trending right now because of the increase in… And Pete, from here, we're going to get into unions. But because of the increase in unionization, I mean, companies have approached us. You see some Amazon facilities unionizing groups, Starbucks went on strike today for privately-held retail companies, probably your world too. Private equity, that's real concern. So retailers and these types of companies are embracing ESOPs or employee ownership as a tool to keep unions at bay.

You will see a lot of employee ownership in the grocery community, in these companies like Harps down in Springdale, Arkansas, right next door to Walmart. Beats them every day and it's because of what Pete's talking about, which is culture and employee engagement.

But Pete, do you have an answer to that or I could move to the union question?

Pete Stavros:             Yeah, I would say retail's among the hardest because there's a huge number of employees relative to the value of a company. So, at Ownership Works, we were working with a union representing their interests, talking to a grocery store chain, trying to convince the grocery store chain that there was value in giving ownership to at least the more tenured colleagues. 'cause those are the ones who make the store go. They know all the customers, they know the stocking patterns, et cetera.

But there are so many, just look at one of these publicly-traded grocery store chains, they have literally like a half a million employees and the whole market cap of the company might not even be $20 billion. So there's just not that much you can do, back to your dilution point, without really issuing so many shares that you're going to impact the stock price. So that makes it hard.

And then also retail, it's not uncommon to have 100%. In retail, I'll say the other way, it's common to have 100% turnover, where literally a hundred percent of the people are leaving the company every year. Those two things make retail hard and that's where ESOP comes in. So ESOP, one of the real benefits relative to what we do is that there are tax incentives, and so people can sell into an ESOP and defer and maybe never pay capital gains on the company that they sold. And then the go forward company, depending on the structure, may pay no taxes. And that helps offset some of these issues I talked about, which is like, wow, there's so many employees and the equity value's not that big. but you're creating more equity value with the tax incentive, tax incentives, plural, which really helps. So I think in retail, ESOP is a great tool.

Mary Josephs:           AJ asks, KKR has a track record of successful investments in Germany as well, where workforces, as you know, I didn't AJ 'cause my world's been domestic, are commonly unionized.

Can you talk high level to how the options and employee ownership incentive plans are structured in Germany versus the US? But I think the question is really the union and the differences.

Pete Stavros:             Yeah. And we've done this with supervisory board structures all over Europe. As I mentioned in Ingersoll Rand, we did this in 80 countries and it's not really that different from rolling this out in the US with the union. And we've done this with steelworkers and teamsters. And Mary and I are working together on something right now with a huge union in the US. Even though it's free and incremental, it needs to be a negotiated benefit. You need to go through the union. Ideally, you kind of make it their idea to some extent, but it's not quite as complicated as it might sound. If you don't handle it well, it won't be received well because a union could perceive it as you trying to come between them and what they perceive to be their employees, not necessarily the company's employees, the union employees. So it needs to be handled carefully, but it's actually not that difficult and we found unions really welcoming of the idea.

Mary Josephs:           We are going to pivot back to leadership 'cause you've mentioned several times on the vital importance of leadership. There's a question to ask you to expand on requirements for leadership.

What are some characteristics you look for in strong leaders in an employee-owned company?

Pete Stavros:             So I would say it is, number one, I don't mean this to sound maybe derogatory towards certain leaders, but you need a leader who really cares. So it is not uncommon for leaders who do this well to be moved to tears over even just rolling the program out. I mean they care so deeply about their workforce or when they get their employee engagement scores.

One of the best leaders I work with is a woman at one of our industrial businesses. She was in tears the first time she got her engagement scores back 'cause she was hurt by seeing her employees not feel recognized, respected, trusted, and she's done an amazing job turning the tide at that company.

So number one, I would say someone who genuinely and deeply cares for their people. Number two, someone who feels an obligation to help their people build wealth, feel better about their role at the company, et cetera. So it's my responsibility. Some otherwise good leaders might say it's the government's problem. The wage structure's all screwed up, we need higher minimum wage, we need more organization around labor or whatever it is. But you need someone who feels like, no, no, no, this is my problem to solve.

And then I'd say the third and related thing is that they think they can actually do it. This can be overwhelming to people. And so, some will kind of be like, "I love the idea, Pete, and I care, I just think I can't do it. This is such a hill to climb." So there's maybe those three things I would say that we would look for. And we're working on it, Ownership Works, psychological assessments and leadership and talent assessments, so that we can try and screen for who is really going to do well and thrive in this work without asking people, "Do you really care?" That wouldn't go well. But there's probably ways to get underneath how leaders perceive the role inside of the company.

Mary Josephs:           Thank you. Leadership is so important. We have a question from Sean.

Does Pete have examples of successful employee ownership models in the healthcare sector?

Pete Stavros:             So we have done this in healthcare. One of the things that Mary and I are working on is in healthcare. I say it tends to be a little bit like retail on the services side in the sense that there's a lot of people and often not a huge amount of equity value. So there's only so much you can do if you've got a limited equity value and you've got tens of thousands of workers.

So ESOP can be a better model there on the services side. It's easier in manufacturing within healthcare, pharmaceuticals. The company I mentioned earlier called Capsugel was the global leader in the manufacturing of capsule shells for drug companies. When we rolled this model out, we ended up selling it to Lonza for five and a half billion dollars in 2017 or 16. And every employee all over the world at that company participated. So yes, we've done it, it's hardest in services 'cause that's more like some of the retail challenges we talked about.

Mary Josephs:           There's not a lot of employee ownership in the healthcare sector. We've talked over time to nonprofit hospitals to who I think innovative CEOs have thought, wow, if we could get employee ownership, you might align the different silos of the hospital to work together. And kind of like your truck drivers story, Pete, and provide more efficiency of services and be able to reduce costs, both for patients and for the hospital system itself. We see some in nursing homes, but it's in, for sure, healthcare consulting, which I would call professional services.

Joey's got a good question and I see this a lot in mature ESOP companies, which is how do you address the free rider problem in ESOPs? And I think this is another issue that your model has more flexibility to target benefit levels to specific employees. But are you familiar with the free rider?

Pete Stavros:             Of course, yeah. I mean, the challenge with trying to address the free rider problem, if you're talking about deep into an organization, how good really is your HR system and your performance assessment system and do people believe in it and think it's objective and fair? So we have some models we're experimenting with where the amount of equity people earn deep into a company is based, not only on their tenure and level in the organization, but their performance. It's just tricky. You really have to have situations where people are like, I understand it, it's objective, which is not common, not when you're talking about thousands of people all over the world and at relatively junior levels of an organization.

Mary Josephs:           We have a question back on when you were talking about how you... First of all, thank you for describing how you allocate incentives to senior and more broad-based. We have a question around that saying that you let senior executives or leadership invest.

Do they get economics that are more favorable than a standard LP? If so, can you share any details on how you structure their investments? A very specific question on executive alignment.

Pete Stavros:             So I'm trying to think that through. Are they more favorable? If you think about the investments that we make personally in our funds and in our deals, it's right alongside an LP in the same security, same structure. We get in together, we get out together, there's no priority or preference. And I can only say for our firm 'cause I think other firms do it differently, the executives would be in the exact same stock. So for their out-of-pocket investments, they would be in the exact same securities, neither advantaged nor disadvantaged. Other firms, I can't imagine necessarily where the executive team would be prioritized over LPs. There are plenty of examples where the LPs are prioritized in the sense that there's a preferred return that needs to be earned before the executive team would earn gains on their equity. But that's not something that we do.

Mary Josephs:           Benjamin has a question. Good one. When the model hasn't worked as well as you initially planned, what are key learnings, three or four things that you've observed on why it didn't work? 'Cause it sounds like you're in a continued evolution of this.

Pete Stavros:             Yap. The leadership team, number one for sure, just didn't do as good of a job, didn't spend as much time on it, wasn't their number one priority every day. And then if you drill down on that, it's often around communication. How well was the program understood? How frequently were they communicating about priorities for the organization, the business plan, where we're headed, how people can help the organization get there. And then, really amplifying the voice of the individual worker inside of the organization. So I would say those would be some areas where things haven't gone as well that I'd highlight.

Mary Josephs:           All right, I'm going to take a quick break here 'cause we've been badgering you with questions, technical questions and there's more and appreciate your time. So you're from Chicago, from the Chicago area, Arlington Heights, which, actually, I live in Arlington Heights. So something that is near and dear to Chicago is the conversation around GOAT or the greatest of all time. And I assume many Chicago-born people align with me that it's Michael Jordan.

But we're going to put a twist on the question for you today, which is the best MBA school in the world? So in alphabetical order and maybe preference would be Booth, Harvard, Sloan, Stanford, or Wharton. And you don't have to answer that one.

Pete Stavros:             Oh God, I would've had to have gone to all of them to be able to have an informed opinion.

Mary Josephs:           Pretty diplomatic, outstanding, Pete. So I have a really good question here from another investor, which is how do you think about structuring and communicating employee ownership plans in M&A roll up deals?

And I get this question a lot of times in the ESOP world when a company is making an acquisition where M&A can create material value, but there's all sorts of issues. So that would be great to address.

Pete Stavros:             Yeah, so for us and the way we do it, the key thing is just making sure you are projecting out, when you're setting up these programs, how many employees are you going to have at the end of the five, seven, 10-year holding period. So that just needs to be thoughtfully considered.

How many people, how much equity value, how are you going to distinguish between people who joined through acquisition in the last two years versus people who were there at the beginning. That acquisition that maybe you do towards the end of your hold period, does the tenure people have at the acquisition count or is it just from the date of acquisition? So in my experience, as long as you're thoughtful upfront and you're allowing for all of these additional colleagues, it can work just fine.

Mary Josephs:           Thanks. This is actually a really good question I think a lot about, with employee ownership, who gets what when, right? And so, this question speaks to that.

Can you speak to how you make decisions initially in ownership distribution on individual employees? Are you thinking about balancing tenure, current contributions, metrics? I can say in the ESOP space for privately-held businesses, as you're structuring a deal, there's a real concern by the selling shareholders to take care of those long-tenured employees who will not still be at the company to be able to realize the benefit of being employee-owned over a 10, 20-year period. I think your situation is a little bit different, so I'd love to hear how you think about it.

Pete Stavros:             So if you're focused on the broad-based aspect of what we do, meaning below the top two, three layers of an organization, there, we do really focus on level of the organization and tenure. And it gets back to the comment earlier about the performance review system and the HR system deep inside of these companies is often either not that great or not trusted by the colleagues or both. So we make it pretty simple. I'm not saying it's perfect, but it tends to be pretty simple. Tends to be how long have you been there? What's your level in the organization? Which is not dissimilar to an ESOP in terms of how the proceeds are divvied up.

Mary Josephs:           There's a question, do you recommend ownership for startups? I can insert that ESOPs are not a great alignment with startups, but I'll let you talk about equity sharing with startups, other forms of employee ownerships.

Pete Stavros:             Yeah, absolutely. I don't know. For us, all stages, we have growth funds. We do this in some of our growth funds, we do it in late stage buyout. It's obviously a real part of the culture in Silicon Valleyaround true venture. So I would say absolutely.

Mary Josephs:           Yeah. There's a question on the gig economy and that's actually really interesting. And this is changing with labor laws right now, but here's how the question's written.

What effect does the gig economy context of independent contractor based labor markets have on potential growth prospects of ESOPs and employee ownership structure? From Gregory.

Pete Stavros:              Yeah. Well, independent contractors, the honest answer is I'm not sure. I haven't come across… We haven't invested in Uber or something, so I don't… The honest answer is I'm not sure, but I don't know why you couldn't have ownership incentives, even if someone's technically an independent contractor. I'm sure you can get around that. That's outside my area of expertise. I just don't know.

Mary Josephs:           In the ESOP world, there is a way, a technique to include independent contractors. This goes back to leadership and culture and we will take a couple more questions and I've got some closing… I ask if you have closing comments and I have two closing questions for you.

What are your thoughts on implementing democratic mechanisms within the firm so that workers gain more decision-making power as well?

Pete Stavros:             That's a key part of it and it is really the two sides of that for us are the kind of micro everyday decisions where we use tools like Kaizen to give frontline workers decision-making authority. And then, there's the other things we do around everything from, hey, this company's going to spend 2 million a year on charitable activities and we want the workforce to decide who we're supporting, how we're supporting them, which charities.

As long as it ties in with the mission of the company, we're happy to fund it, all the way to the example I gave earlier of here's a million dollars of capital expenditure budget a year. You all can decide where it goes and how it's spent, as long as it makes the workplace a better environment. And then, back to the kind of everyday micro thing, we often do training for supervisors and facilitations. We don't do it, but we would hire a firm to make sure people's voices heard. Supervisors are trained to listen. A lot of these manufacturing businesses are run like the military where you take direction, you do your job, you keep your mouth shut and changing that can take some real effort.

Mary Josephs:           Time and intention for sure. In the current last question, I'm going to move to two closing questions and any closing comments you have. It's phrased this way in the current environment where many firms are reducing their workforces. I think the second part of the question is also very interesting.

How can employees be incentivized over the long term rather than the short term? And you kind of alluded to this in the beginning, which is, I mean, even with being in an ESOP company where you could have a path to $500,000, a million dollars retirement balance if you stay, employees will leave for that dollar an hour. So in how you're crafting employee ownership and engagement, how do you think about that short term versus long term?

Pete Stavros:             How do we prevent peoplefrom not valuing the long term do you mean?

Mary Josephs:           Yeah.

Pete Stavros:             Yeah. So one of the things that we do and a lot of it comes down to communication, we also try and pay frequent dividends on the stock when we can, so that people can see it's not just a hope of making X thousands of dollars five, seven years down the line. But at this garage door company, I think we paid, I can't remember, I think we paid five dividends on the shares over time. So when people are getting two, three, four, $5,000 dividend checks, it's definitely a reinforcing mechanism of this is real and the payoff potential is real.

Mary Josephs:           Okay, one of two closing questions and I'm going to invite you to give some closing remarks. Pete, any advice to this audience, Booth students and alums, from the Rustandy Center for Social Impact and Impact Investing on strategies or ways to plug into the employee ownership movement, skill development experience, niche opportunities?

Pete Stavros:             Oh gosh. Well, I guess there's lots of ways. You could get involved in the ESOP world of which Mary is obviously a leader and there's thousands of ESOP companies out there. So you could get involved with an individual company, you can get involved on the investment or banking side, you could get involved in nonprofits that are around this.

There's groups like Ownership Works, which was the nonprofit that my wife and I started. There's Project Equity and there's a bunch of them. So I would say across ESOPs, regular way private equity, co-ops, the nonprofit side, individual companies that have broad-based plans, there's probably a bunch of ways to get involved.

Mary Josephs:           Thank you. Pete, what would you tell your MBA self today if you went back?

Pete Stavros:             I would tell my MBA self probably to try and enjoy the journey a little bit more. Everyone is so driven and you want to get where you're going as fast as you can. And I'm approaching 50 and I probably could have enjoyed it a little bit more along the way. I was just pushing so hard to get where I wanted to go, including on this ownership front. I was killing myself developing this model, starting this nonprofit foundation, trying to get other firms to join and probably could have enjoyed the journey along the way a little bit more. Everyone gets to where they're going in due time. It doesn't mean you can't work hard, but there's probably a way to do it and enjoy it along the way.

Mary Josephs:           It is. Any other comments you have on employee ownership and Ownership Works and the work you're doing?

Pete Stavros:             No, thank you for having me. I appreciate everyone's interest in this topic. I do think it's important and I feel like there are some green shoots around the country that seem like this is gathering some steam and hopefully we can really make some progress.

Mary Josephs:           Thank you for everything. Thank you for your time tonight,back on pushing so hard. It was so generous and kind of you to accept the invitation from Booth to join us tonight and advance the conversation.

Pete Stavros:             My pleasure. Thank you for having me.

Mary Josephs:           All right, have a good evening, Pete.

Pete Stavros:             Thank you.

Will Colegrove:         And thank you as well to Mary for moderating a wonderful conversation. This was incredibly, incredibly insightful and thank you to our audience for asking so many incredibly wonderful questions. We hope this is the first of many employee ownership conversations in thinking about the future of impact investing. So thank you from the Rustandy Center to everyone for joining us and we hope to see you again soon. Thank you.

Mary Josephs:           Thanks all.