Statement of Delores L. Thomas, President, Ewing & Thomas, Inc.,
New Port Richey, Florida, on behalf of the ESOP Association

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

Hearing on Employee and Employer Views on Retirement Security

March 5, 2002

Mr. Chairman, and members of the Oversight Subcommittee of the House Ways and Means Committee, needless to say I appreciate and I am honored that as you review our nation’s tax laws that apply to our tax qualified deferred compensation plans, or ERISA plans, you would want to hear from a representative of the employee ownership community, particularly employee ownership through employee stock ownership plans, or ESOPs.

As noted, I am Dee Thomas from the 100% ESOP company, Ewing & Thomas, an independent physical therapy provider in New Port Richey, and Sebring, Florida.  My official title is President of Ewing & Thomas, and I still work daily in literally a “hands-on” capacity with patients in Florida’s Fifth District.

In 1988 we became an ESOP company.  Mrs. Ewing and I began the company in 1969.  Mrs. Ewing is 20 years older than I, and I had become seriously ill.  We needed an exit strategy; and although we nearly sold out, we felt uneasy selling the company out from the employees.  So we sold to the employees through an ESOP.  I own no stock, and have no stock options in Ewing & Thomas.  We have 22 employees, and they participate in the ESOP as owners.

Clearly we would not be here today except for the unprecedented, and from my vantage point in New Port Richey, unfathomable, collapse of Enron.  While tragic in its impact on Enron employees, the people of Houston, and on our nation’s faith in financial reporting procedures, we in the employee ownership community now have a golden opportunity to put a positive focus on employee ownership programs in the United States.

And we believe that if that focus is objective in its review, this nation will not go down the path of making ownership the privilege of a few, but actually ratify this nation’s policy of encouraging employee stock ownership programs, while recognizing both the risks, and the rewards of ownership among many in a free enterprise society.

While many might scoff at this statement, I want to make a point that many of us feel in the employee ownership world.  We believe the United States has more employee ownership than any other nation in the world, and employee ownership has grown and become more accepted since Congress sanctioned employee stock ownership plans in 1975.  While one can pick up books, articles, and speeches by many so-called thought leaders in the 70’s and 80’s predicting that the United States would soon play an economic third fiddle to nations of Asia, particularly Japan, and a unified Europe, the fact is that in the last 15 years our economy has outperformed all other nations, and we are second fiddle to no one in the strength of our economy.  We believe that there is direct relation between the amount of employee stock ownership in the United States, and the success our nation has experienced compared to other industrialized nations of the world.

If our belief that there is a relation between our economic strength and economic democratization through more employee stock ownership is correct, then you can understand why we are so afraid that there will be a hasty rush to judgment in reaction to the Enron collapse that will undermine one of the great stories in America the past 25 years—more economic democratization through our ESOPs, 401(k) plans, and other forms of compensating with company stock.

I come today to highlight some data about the ESOP and employee ownership world, to help you make decisions on some difficult issues involving our ERISA plans, particularly defined contribution plans with company stock.

But I do not wish to be repetitive to the very excellent document prepared by the Joint Committee on Taxation Present Law and Background Relating to Employer-Sponsored Defined Contribution Plans and Other Retirement Arrangements, February 26, 2002. 

Unlike media reports on company stock and the Enron fiasco, the Joint Committee clearly spells out that employee stock ownership can be a good thing for a variety of reasons, and that retirement income security can be a good thing as well, but that there is tension between the goals of employee stock ownership and retirement income security.  Your job is to decide the specifics of our programs, whereas the media reports seem to imply that the only issue facing Congress and the Administration is retirement income security, and who cares about employee stock ownership?

Obviously, as an advocate of employee ownership, as an advocate of more employee ownership, not less, as someone who really believes making ownership be the privilege of a few is detestable in a free and democratic society, I urge you to not take action that will undermine ESOPs and employee stock ownership.

There is some confusion about the various forms of employee stock ownership, and some pundits, and even some elected officials, say that they love employee ownership, but do not wish to see employee ownership be part of our ERISA system through ESOPs.  Such a view, while well intentioned, would lead this nation to having as little employee ownership as most of our world-wide competitors, and is thus short sighted.

Truly, there is only one ERISA plan that Congress has specifically declared is an employee stock ownership program as well as a retirement income security program, and that plan is the ESOP.  Because of this Congressional decision, there are special rules that apply to company stock in ESOPs that do not apply to company stock in other plans.  The Joint Committee document spells out the special rules applied to ESOPs that make them more ownership plans while also balancing the desire to have them remain ERISA plans.

And the Ways and Means Committee can take pride that this committee, contrary to what some casual observers think, has led the way in structuring our ESOP laws, particularly the laws making ESOPs better ownership plans and better retirement security savings plans.  For example, there is much debate with regard to diversification of company stock in public companies with ESOPs.  The current law of permitting 50% diversification for ESOP participants age 55 with 10 years of participation in the ESOP was adopted by the Ways and Means Committee in October 1985.  In the ESOP world, we call this amendment, the “Anthony” amendment after former Congressman Beryl Anthony, who authored the amendment.  It was adopted with only one vote in opposition.  It was proposed, and this is relevant, as a substitute for a proposal from then Chair Dan Rostenkowski that provided for diversification of ESOP stock after five years.

This is the fifth time this Oversight Subcommittee has examined ESOP law since 1986.  So, Mr. Chairman, when we ESOP advocates come before Ways and Means and the Oversight Subcommittee, we know we will be heard.

But Ways and Means is not a Johnny-come-lately to company stock issues. In the 1920’s, the committee sanctioned the use of company stock in tax-qualified deferred compensation plans.  Many U.S. corporations have used company stock as compensation since the 19^th century.  And let me say right here that no one can point to any period of time of in our history since then-- a time of one depression, many recessions, and boom times-- when a significant number of elderly Americans were living in poverty or dire straights because their companies’ compensated them in some manner with stock in the company.

Right now a common arrangement is having company stock be contributed to an ESOP in a relationship to a 401(k) plan, or what is called a K-SOP.  If you studied each of the many “Enron” response bills pending, nearly all seek to change the rules for when an ESOP is operated in conjunction with a 401(k) plan.

And there is confusion about stock options that are broadly available to employees.  Stock options are still primarily a compensation tool for the highly paid, while permitting it for all employees has grown in the decade of the 90’s.

Let me make one clarification right now:  Stock contributed to an ESOP is accounted for on financials as a compensation cost on an income statement.  Too many of the media reports are confusing the accounting treatment of stock options with the accounting treatment of ESOP contributions.

Some companies talk about stock purchase plans, which are very similar to stock option plans in that an employee might purchase stock at a discount compared to current market value.

But for your purposes, the focus should be on ERISA plans; again, the Joint Committee document adequately explains how company stock, what kind of company stock, and what kind of plans are all involved with company stock, and how use of company stock relates to the rules and laws of ERISA.

The primary controversy is over 401(k) plans and ESOPs; in particular, 401(k) plans and ESOPs that are funded with employee contributions and employer contributions in coordination.

Every bill introduced in response to the Enron collapse has a “carve” out for ESOPs, in varying degrees. 

For example, the Administration bill, as introduced by your colleague Congressman Sam Johnson, provides that there is no change in current law with regard to “stand alone” ESOPs. 

Your committee colleagues Congressmen Portman and Cardin provides that there will be no change in current law with regard to ESOPs sponsored by privately-held corporations, which in reality means about 90 to 95% of the ESOP programs in America, covering we estimate about 3 million employees.  Probably the bill that caused the most controversy, the bill by Senators Boxer and Corzine, did not apply caps on employer securities held by ESOPs.

To give a feel for what are the various ERSIA plans sponsored by ESOP companies, I share data from a survey done recently by The ESOP Association:  19% of the ESOP companies only sponsored an ESOP; 29% of the ESOP companies in the Association sponsor an ESOP and a 401(k) plan that has no employer match, and no employer stock among the options for employee deferrals; 41% of the ESOP companies sponsor an ESOP, and a 401(k) plan with a company match in cash, but not in company stock, and there is no company stock as an option for deferrals; 12% of the ESOP companies in The ESOP Association sponsor a K-SOP, and of this number, among our Association members, who are 97% privately held corporations, 90% were private corporations.

Thus, if the committee adopts new rules restricting company stock in K-SOPs, or new quick diversification rules for K-SOPs, or new rules for public companies but not private companies with ESOPs or K-SOPs, you will be unraveling some companies employee stock ownership plan.

No one argues every law is carved in stone; no one argues that each tough question you face when you legislate is either/or.  But, in alliance with the Coalition of Employee Retirement Benefits, or CERB, which was founded by our Association, the Chamber of Commerce, National Association of Manufacturers, the ERISA Industry Committee, the American Benefits Council, and the Profit Sharing/401(k) Council, we do say that if Congress changes laws with our 401(k) programs and our ESOP programs, you will have an impact that may be negative on employee stock ownership and the voluntary retirement savings system.   (Please see Exhibit 1).

And, I want to conclude with this point.  The facts are right in front of you from the Joint Committee document.  Don’t believe that what the media is saying that “most” Americans used to be in defined benefit plans, and that now “most” Americans are now in defined contribution plans where their future is at risk because of company stock.

The truth is before you in the Joint Committee document:  Most American employees are not in any kind of ERISA plan.  Most American employees were never in defined benefit plans. The fact is that coverage of more employees should be a major goal of our voluntary retirement savings system, not nitpicking and putting new restrictions on our defined contribution plans that have actually increased coverage.

This committee last year pushed to successful enactment the wonderful Portman-Cardin bill, which had near unanimous support in both Houses of Congress.

As a small business, which is what most American businesses are, and is the area where coverage of employees is weakest, we cannot afford to go through hoops and loops, to spend more and more of our hard-earned dollars on complying with ERISA, or on fees paid to money managers, instead of helping our employees save for the future.  Let me assure you, sponsoring an ESOP, or a K-SOP means many dollars are being used to make sure we comply with the law.  I know of other small business people who have an ESOP, or dropped their ESOP because of administration costs and complexity.

And for our friends in bigger businesses, either private or public, sure they might be able to afford spending more, but their share of the American workforce is not expanding as it is among small employers where expanded coverage is needed.  And, while the bigger employers might be able to spend more to have their K-SOPs, their employees, just like the employees in a small company, will get less when more and more money of the company goes to outside vendors for compliance costs.

So, it is somewhat frustrating to hear of the “crisis” in America that our workers are at risk of living in poverty because of company stock in defined contribution plans, when there is no historical evidence that this is the case, even with some highly publicized bankruptcies.  It is frustrating to think that the reaction of Congress and the Administration is one that has a high chance of taking us down the road of less coverage by ERISA plans, and even less employee ownership, leaving us as a nation truly more dependent on Social Security for the majority, while ownership becomes even more the privilege of a minority--the privileged few.

Now I would like to turn over my time to my good friend Karen York, to give a perspective not of a top executive, or pension expert, but of an employee owner, who works on the front line of employee ownership everyday she goes to work at Scot Forge. Karen,

Exhibit 1

COALITION ON EMPLOYEE RETIREMENT BENEFITS
Protecting the American Dream

February 25, 2002
Representative Amory Houghton
United States House of Representatives
1111 Longworth House Office Building
Washington, DC  20515

Dear Representative Houghton:

On behalf of hundreds of thousands of American businesses that offer retirement benefits to workers, we are writing to urge you to proceed with caution before making any changes to current retirement policy.  Our nation’s voluntary retirement savings and employee ownership programs are a great success, but ill-conceived legislation and regulation could put the benefits of many workers in jeopardy.

Currently, 56 million American workers participate in 401(k), profit sharing, and employee stock ownership plans (ESOPs).  Pension legislation enacted in June 2001 should increase that number.  One of the hallmarks of the current system – flexibility for employers to design a benefits package that is most appropriate for their workers – is a crucial component to the system’s success. 

We are concerned that various elements of retirement bills currently pending before Congress may unintentionally harm workers’ ability to save for their retirement.  For example:

• Percentage caps, limits on holding periods, and diversification mandates will limit employee choice and deter employer matches.  Millions of workers have benefited from the ability to invest in company stock.  Imposing a one-size-fits-all approach by limiting certain investment choices – most notably company stock – will hurt many workers who strongly support their ability to make their own investment choices.  We urge Congress to focus instead on encouraging investment education and professional investment advice so that workers have the tools to make wise retirement planning decisions.
• Arbitrary restrictions on transaction suspension periods (also known as “blackouts” or “lockdowns”) could interfere with the normal process of improving 401(k) plan administration.  Transaction suspension periods help ensure the orderly transfer of data between plan recordkeepers, and often help to increase participants’ plan options (such as increasing the number of employees’ investment choices or frequency of trading capabilities).
• ERISA mandates a strict level of fiduciary behavior for plan sponsors and provides stringent sanctions for any violations.  Any proposals to change that framework will impact costs for plan sponsors and participants and will have a chilling effect on efforts to expand pension coverage for workers.

In the ensuing months, we urge you to proceed with caution in making any changes to current retirement policy.  In order to ensure the retirement security of American workers, it is

critically important to make sure that the positive trends in retirement coverage continue instead of letting an unprecedented event like the Enron collapse lead us to misguided and potentially damaging responses.

For more information on these issues, or if you have any additional questions, please have your staff contact CERB Steering Committee members James Delaplane of the American Benefits Council (202-289-6700), Janice Gregory of the ERISA Industry Committee (202-789-1400), Michael Keeling of The ESOP Association (202-293-2971), Dorothy Coleman of the National Association of Manufacturers (202-637-3077), Ed Ferrigno of the Profit Sharing/401(k) Council of America (202 626-3634) or Kathleen Havey of the U.S. Chamber of Commerce (202-463-5458).

Sincerely,

Exhibit 2

Set forth below are 34 “success” stories (14%) of the total responses received in from a 17-question e-mail survey, regarding plan structure.  The survey was distributed among The ESOP Association’s approximately 1250 company members, with a request that the responses be submitted within 72 hours, and that no one provide individual balance information they were not comfortable sharing.  Under the tight deadline, and with several respondents preferring not to disclose account balance information, the following 34 examples were selected.  Out of the 250 responses, nearly 50 indicated that the ESOP was less than five years old, and thus balances had not been built up. 

The statistical results of the survey are provided on another document.

1. McKay Nurseries, Waterloo, Wisconsin.  Private company. Won 1996 National Business Enterprise Award for its inclusion of migrant workers in its ESOP and benefits programs. Last December distributed $2,000,000 as follows: Monsies Gomez, $484,000, digging crew leader; Marv Frey, $406,000, nurseryman; Charles Benisch, $516,000, truck driver; and Victor Molina, $321,000, farm chemical applicator.  Two employee owners, non-management, currently have balances over $1 million.  All are retired, and would be honored to speak to Congress. 

2. Kelso-Burnett Company, Rolling Meadows, Illinois. Private company.  Construction estimator, balance in plan, $1,000,000; Purchasing agent, balance in plan $700,000; Safety director, former receptionist, balance, $490,000; Construction project manager, retired in 1999 with $1,050,000 distribution.

3. RLI Corporation, Peoria, Illinois. Public company.  Average employee retires with account balance that is 10 times annual salary.

4. Bridge Community Bank, Mechanicsville, Iowa.  15 employees, paid out to the few retirees since 1990, all non-management, over $1,000,000 in total.  Quote, “It would be a crime if a company such as Enron had an impact on our success and took the opportunity to share the wealth away from our employee-owners.”

5. SnapDrape, Carrolltown, Texas. Private company.  Has paid out 29 employees since ESOP began in early 90’s.  Of 29, 26 paid between $330,000 and $1,000,000.  One payout of $110,000, and two, barely vested, left with just under $20,000.

6. Scotts Insurance, Lynchburg, Virginia. Private company.  With workforce with average pay of $30,000 to $40,000, average payout from ESOP to non-management employees is $1,000,000.  Two earners in company, which is small sales staff, will retire with over $2 million.

7. Chardon Laboratories, Reynoldsburg, Ohio. Private company.  ESOP only four years old.  Blue-collar workers have already accumulated 1 times annual pay.  Average in 401(k)—few participated, and those that did had much less than annual pay.

8. Alterman Management Group, San Antonio, Texas. Private company.  Very small, but last year, project manager retired with $850,000 from ESOP, and $125,000 from 401(k), and purchasing agent with $500,000 from ESOP, and $100,000 from 401(k).

9. Columbia Quarry Company, Columbia, Illinois. Private company.  Those with 10 years of service have received up to $1,500,000 distribution from ESOP.

10.  New River Electrical, Cloverdale, Virginia. Private company.  Two non-management employees retired last year with ESOP distributions over $500,000.

11. Beacon Technologies, Atlanta, Georgia, Private company.  Employee retired last year, who never made more than $30,000 per year with ESOP distribution of $450,000.

12. Fleetwood Group, Holland, Michigan, Private company.  Joyce retired last year with an over $1,000,000 distribution from ESOP.  Joyce was an hourly worker.

13. King Arthur Flour, Norwich, Vermont. Private company.  Relatively new ESOP, a few years, employee terminated this year with over $250,000 in account.

14. Stylmark, Inc., Minneapolis, Minnesota. Private company.  Over years, common for lower paid employees to retire with well over $100,000 in accounts.

15. Weldon Machine Tool, York, Pennsylvania. Private company.  Typical truck driver with 10 years has over $100,000 in ESOP, with several over $200,000.

16. K.W. Tunnell, King of Prussia, Pennsylvania.  Man left one company after 15 years, with no retirement.  Worked less than 13 years at Tunnell, and retired with $278,000.

17. Garney Companies, Inc., Kansas City, Missouri. Private company.  Laborer out of high school, with 17 years in ESOP, now a superintendent, has over $1,000,000.  Similar person, laborer most of his career, left some years back with over $550,000.

18. Cummins-Wagner, Annapolis Junction, Maryland. Private company.  Last two years, $3 million distributed to 15 departing employees.

19. Green Point Savings, Lake Success, New York. Public company.  In addition to company’s pension and 401(k) plans, ESOP provided $400,000 to mid-level manager retiring last year, and over six years to clerical worker retiring last year.

20. Media Loft, Minneapolis, Minnesota, Private company.  Has allocated over $5,500,000 in six years to all employees from a work force never larger than 52 employees.

21. Builders Supply, Omaha, Nebraska. Private company.  Many employees from non-management ranks retired in past few years with distributions ranging from $100,000 to $500,000.

22. Lowe’s Corporation, North Wilksboro, North Carolina. Public company.  Published reports are of over 200 mid-level to low pay employees retiring with over $1,000,000 in the last 30 years.

23. Western Contractors, Rancho Cordova, California. Private company.  Raymond Roelofs, warehouse employee, retired with over $500,000 in ESOP distribution.

24. Chaska Chemical, Savage, Minnesota. Private company.  Several employees had accumulated around $40,000 in diversified 401(k)’s  from 1984 through 1994, and then the ESOP was installed.  In seven years these employees’ accounts are $250,000 and over.  Employees are in late 40’s and 50’s now.

25. Southern Rubber Company, Greensboro, North Carolina. Private company.  A testimonial: “After 7 years a number of our employees have accumulated sizable account balances.  Clearly they have larger balances than if the company had continued with the prior profit sharing plan.  The employees also have a job and future that they may not have had if the company was sold by the prior owner to an outside investor.”

26. Antioch Company, Yellow Springs, Ohio. Private company.  23 balances over $1 million.  26 balances over $500,000.  These 49 balances are all non-management employees.

27. Minnesota Power, Duluth, Minnesota. Public company.  In 20 years of ESOP, the average 20-year return on company stock in ESOP has been 17% per year!

28. Palos Bank & Trust, Palos Heights, Illinois. Private company.  Since ESOP created in 1990, the appreciation of company stock in ESOP has been 750%!

29. Scot Forge, Spring Lake, Illinois. Private company.  Lathe operator in machine shop, $783,818; machine operator, $478,576; maintenance mechanic, $881,073; forge shop supervisor, $814,716; electrical engineer, $660,489; final inspector, $603,303; press operator, $563,665; machine operator, $597,207; and sale and customer service $574,826.

30. Technical Assistance & Training Corporation, Washington, DC. Private company. 30 employees, revenues average $5.4 million, one employee has $310,000.

31. LeFiell Manufacturing, Santa Fe Springs, California.  Private company.  ESOP until recently less than 50% ownership among employees.  Machine operators and machinists, 10 people, accounts from $100,000 to $200,000.  (CEO started as machinist in 1962, ESOP created in 1974, account balance is near $900,000.)  Around 140 employees total.

32. Woodward Communications, Dubuque, Iowa. Private company.  Non-management employee, 8 years in ESOP, $54,328; Non-management employee, 9 years in ESOP, $52,126 in ESOP.

33. Ruekert & Mielke, Inc., Waukesha, Wisconsin.  Private company.  Individual with high school education started as laborer, retired before 65, with a $550,000 ESOP distribution.

34. Keller Structures, Kaukauna, Wisconsin. Private company.  Salesman, 12 years, left company with $1,410,000 in ESOP.  Salesman, 12 years left company with $670,000.

35. Ecker Enterprises, Chicago, IL. Private company. Accounts payable clerk, final year pay was $29,000.  Left the company with a little over $400,000 in ESOP distribution.

We do not have data from non-ESOP companies.  Prominent non-ESOP companies that supposedly have provided great wealth are Intel, Publix Supermarkets and Microsoft, to name a few.  BNA, Starbucks and Southwest Airlines all have significant employee ownership.

 For so many of the ESOP companies, the employee ownership style is more than the money.  It is the culture, and almost the religion of the entity.  Evidence are the few comments set forth below that recently were sent to The ESOP Association as companies learned that the Enron fall out would perhaps threaten their ownership culture:

 “The bigger success story for our 90-year-old engineering/architectural-consulting firm is the change in attitude in our firm.  We are seeing an end to the “us versus them”, “shareholder/non-shareholder” attitude.  We are developing a culture of unified company rather than nine disjointed departments.  We are seeing huge contributions from employees who would have previously preferred to not be involved or limit their involvement”.

                                      Toltz, King, Duvall, Anderson & Associates, St. Paul, Minnesota

“We are a new ESOP…However, we do have culture change success stories.”
                                      Schaefer’s Systems, Inc., Adair, Iowa

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Exhibit 3

 Note: As abbreviated below, “JMK” is J. Michael Keeling, host of the “Michael Keeling Talks Employee Ownership,” which aired from June 2001 – September 2001 on Providence, RI-based WALE 990 AM.  Mr. Keeling is also President of The ESOP Association. 

“Karen” is Karen York, Staff Accountant for Scot Forge Company in Spring Grove, IL, and a member of Scot Forge’s ESOP Committee.

The following transcript is from a July 9^th radio show, during which Mr. Keeling had Karen York as his guest.  The text has been edited slightly to remove promotional material for The ESOP Association and WALE AM.

 Michael Keeling Talks Employee Ownership

 JMK- I am very excited to have as our guest Ms. Karen York from Scot Forge Company.  For the past several weeks we have talked about quality of work, and balance in life/work, and how this plays into employee ownership.  Welcome Karen.

Karen-Thank you Michael

Karen-My title is Staff Accountant – I also work with the ESOP Committee.  Scot Forge is a manufacturer of rolled-die and rolled-ring forgings. 

JMK-How long have you been with the company

Karen- For fifteen years.

JMK- And was Scot Forge ESOP when you came?

Karen- The ESOP was put in place in 1978, but did become really active until around 1984-1985.  We were still an infant ESOP when I came.

JMK- What is the ownership structure?

Karen- We are a 100% employee-owned S Corp. ESOP – We have approximately 500 employees.

JMK- And Karen, what was the company’s motivation in implementing the ESOP back in 1978?

Karen- The Chairman of the Board and his family owned all of the stock – he had inherited the company from his father.  He felt that the hard-working employees should be rewarded for being so dedicated and for making the company so successful.

JMK-Did Scot Forge become 100% immediately?

Karen-No, Initially the prior owner donated about 20% and we have gradually purchased stock until 1997 when we became 100%.

JMK-When did the ESOP Committee start

Karen- In 1987 or 1988.  We had been an ESOP for 10 years, but no one really knew much about what an ESOP really was or what it meant to the company.  The real attitude of ownership that the seller hoped to foster was just not there.  So he put together this committee in which employee’s voices could be heard.

JMK-That is interesting.  He was beginning to think about an ESOP Committee very early on. 

Karen- He felt that the ideas that evolved from workers on the floor on a daily basis are more valid than those generated by upper-level managers.

JMK- You know I visit a lot of ESOP companies, and in companies where employees other than top-level managers are interested in share value, these companies tend to have ESOP Committees or Counsels.  In fact, fostering that ownership culture is the “thing” to do among employee-owned companies. Before we continue, let’s talk about your background?  Did you start as staff accountant?

Karen- Yes.  I had worked with my husband in a two-man business, and we both left and I went to work for Scot Forge.  We felt a small business was too much pressure, so we sold it and I went to Scot Forge.

JMK- Were do you live?  In the city?

Karen –No.  We live on a 20-acre farm with hay and livestock – a town with 200 people (outside of Spring Grove).  An upbeat town in our area has 500-1000 people.

JMK- I mention this because many of the people in your company are second and third generation farmers.  They understand the attributes of ownership that are necessary to make a living which are synonymous to the attributes of ownership.  They understand the things they own and need to take care of and nurture.  And they recognize that they lose money if they do not. 

Karen-That is true, Michael

JMK-In fact, I have heard said over the years, and this is not meant negatively to urban-dwellers, but that those who must nurture what they own, and make a living with their land and livestock tend to make very good employee owners.  Now, if that was the only way that one became an employee owner, we would have very few employee-owned companies and employee owners.  Have you every heard that thought before Karen?

Karen- No. I have not, but it makes sense that farmers understand ownership because of their rural backgrounds.  For our company, the ownership culture has been easier to establish because people truly understand ownership of REAL property.

JMK- Because these people better appreciate and understand real ownership, it does not mean they are necessarily better employee owners.  It just means they have the capacity to better understand.  Now, I want to delve into Karen’s experience at Scot Forge when we come back from the break.

JMK- Welcome back… Michael Keeling with The ESOP Association talking employee ownership.  As we left the first segment, I was discussing with Karen some of the characteristics of employee owners, and some of the characteristics that make them good employee owners.  I do not assume Karen that you came to Scot Forge planning to be active on the ESOP committee?

Karen-Absolutely not.

JMK- So how did you get involved?

Karen-When I started with the company, I knew I was getting good benefits and good pay – but after about one year, I noticed that something was different.  I got the feeling that there was more camaraderie here than in other companies.  I ran for the ESOP Committee once, and did not get elected.  So, I ran again the following year and did get elected – the Committee was a really eye-opening experience. 

JMK- How often do you meet and what do you discuss?

Karen- We meet once every other month.  We have tried several different time scenarios, and this seemed to be most effective. Our primary focus is education.  We learn as much as we can about ESOPs and employee ownership so that we can educate our fellow employee owners.  Employee owners actually come to us with questions and we need to be equipped to answer their questions.  If employees have problems, sometimes they are more comfortable talking to us than to the CEO.  On the occasions when we cannot answer questions, we may bring in a member of the management team, but employee questions will always remain anonymous.  It has worked really well.

JMK- So, one, it sounds like you are the “go-to” guys.  How many on the committee?

Karen- Nine regular people, plus me.  My term ended years ago, but because of my position right next to our CFO (who has all the answers), I have been asked to stay on as an educational resource.  We elect one member/year from each of our plants to serve a three-year term. 

JMK- Can people be re-elected?

Karen- Yes.  At first, we wanted to give everyone a chance.  But since, we have noticed that some people just have a tremendous amount of enthusiasm and are assets time and time again, so we amended the by-laws to allow people to seek re-election.   Thus, we always have familiar and new faces.

JMK- You are an ex-officio resource then?

Karen- Yeah, I guess so.

JMK- You spoke of the committee’s role in educating fellow employee owners about ownership.  I think it represents how we are moving from our previous shows to trust, passion, etc… We want to help employees understand that the ESOP is just not for the top people in the company. Education is semi-laymen’s terms of legal, administrative advice, etc…, and from what I understand from you, the committee serves as a liaison among all levels of staff with regard to legal and administrative updates.  Does the committee also communicate financial information, business strategy, etc… to employee owners?

Karen- At Scot Forge, we share financial data with employees on a monthly basis.  We have a “free” lunch every month, and the division managers break it down and explain how each division did.  The ESOP Committee tries to help employee owners understand the numbers, and to help them understand income statements and balance sheets. 

JMK- In other words, as is becoming a trend among a lot of closely held businesses, Scot Forge is practicing some form of open-book management, as far as the employees are concerned.

Karen- That is correct.  We believe that if you are an owner, you need to see the numbers and understand the numbers.

JMK- You are also doing breakdowns of account statements, etc… and some of that is difficult to understand??

Karen- Yes, that is really where the ESOP Committee comes in.  While many of us are not familiar with accounting standards, we educate ourselves and communicate to employees.

JMK- It would be interesting to learn how closely held companies that utilize open book management fare in the marketplace.  After our break, we will consider take a look at this phenomena.

JMK- I am talking to Karen York, 1998 National Employee Owner of the Year for The ESOP Association.  She is Staff Accountant for Scot Forge – she is not an upper-level manager.  Prior to the break, we were talking about open-book management and how Scot Forge communicates company numbers to employees and non-accountants.  Now Karen, many owners of closely held companies fear that if they share the books, that employees will go tell their neighbor, say it in church, or use it as leverage to get another job.  Have you had any experience this?

Karen- No, not that we know of.  We share the same information with everyone and try to ensure that they understand how the money is made and where it goes.  We hope this means that employee owners will understand where they can save money and hope the company will overall be more profitable.

JMK- Sure… And this brings up another issue.  Do employees know one another’s salaries?

Karen- No, salaries are their own business. We share graphs and charts showing total sales dollars, and whether it is up or down and how that compares to the budget.  We try to explain the different between raw sales numbers and profits.  We also try to specifically explain where each employee owner fits into the budget, and where salaries and benefits fit, and where unforeseen mechanical breakdowns fit in.  We do not breakdown salaries, though – that is how we break the numbers.

JMK- You mentioned training that the committee receives/gives in educating employee owners.  How is this done?

Karen- We bring employees in during their orientation, and we give them an overview of the ESOP and a review of the vocabulary that will be used at the monthly meetings.  We use a lot of slides and visual aids to assist in their understanding.

JMK- Without dwelling on open-book management, many in the ESOP world feel that it is crucial.  Out of all of your workforce, are there some folks who just don’t understand the financials?

Karen- Yes, there are a few. There will always be a few who just don’t get it.  There are also a few who do not care.  But we do our best, and we get a lot of great questions, which indicates that people are learning and understanding as best they can, and want to learn even more.  We just keep making the pitch that reaches the most people.

JMK- And that leads me to the bigger picture.  Why is Scot Forge the way it is?  Earlier in the shows, a lot of discussion has come up about the nature of work, and how work can be rewarding – we hear a lot about technology.  Scot Forge does things they way they have been done for years.  500 Scot Forge employees are not sitting at home at midnight working on their computers, correct?

Karen- That’s correct.  Our company has been around for 108 years, and the industry has been around even longer.

JMK- I would assume then that this creates a great sense of pride among employee owners at Scot Forge.  I would also assume it creates a great sense of responsibility and I would maintain that anyone who holds a job has some sense of responsibility.  I still seem to feel that Scot Forge has a little something extra that in addition to being proud that you as an individual can do a good job.

Karen- Absolutely.  You are not only producing the best parts you know how to produce.  You come in and you do the best job you can – here at Scot Forge, you are an owner.  You are building a company and building value in stock that you own. 

JMK- This again brings us back to the human link that creates the kind of environment you read a lot of books about. 

JMK- We have gone through Scot Forge, the ESOP, your job and open book management.  You have been there for 15 years, do you think that people in Scot Forge have a passion for the company and for employee ownership?

Karen- Yes, I think so.  Prior to this broadcast, we had an ESOP committee meeting, which was attended by several of the members of our Board of Directors.  There was a new committee member – he is in first term – and he had that passion – he was questioning as to how anyone employed by Scot Forge could NOT love such a great company, especially a company that offered a chance to be an owner.

JMK- In earlier shows, we talked about having a passion for the jobs we do.  You know, work dominates our lives.  I know you and your husband have a passion for the work you do in the home.  But really, our waking ours are spent doing a job we get paid to do, and having passion certainly makes it more enjoyable.  What are some characteristics that lead to the passion?

Karen- Tough question.  Here at Scot Forge, many of our workers never went to college.  They learned the trade on-the-job.  Thus, the passion comes more from the circumstances of the work.  They are not just here to get a paycheck – they are saving for the future and the company will eventually pay them back.

JMK- A few weeks ago I wondered why so many employee owners are passionate about their work, and I think that a large number of employee owners have respect for one another.  I think the CEOs in most of these companies have respect for all the employee owners.

Karen- If you work in a place where you feel you are respected, you can trust your co-workers.  We consider ourselves equals in this company.  No one is better than anyone else.  Being in an employee-owned company generates a lot of enthusiasm for the company and for employee ownership,

JMK- I think that is linked, too.  I understand that there are many great companies out there that are NOT employee-owned. But I think that when you walk into a company and hear there is ownership in the company, I think there is large-scale respect in that company.  And that respect stays in place.  Respect and trust fit well into companies with ownership structures.  Taking a break.

JMK- Before closing out with Karen York, I want to mention that next week’s guest will be Dr. Joe Blasi.  We can show the world that employee ownership is not just you and me talking that there are hard statistics to back it up.  Now Karen, here is the question I have asked all of my guests.  I have been to nearly 300 employee-owned companies, many of whom are impassioned. Scot Forge has passion, you have passion for work, why do you think we do not see more employee ownership in America, and why do we not see more educators, thought leaders and politicians touting employee ownership?

Karen- From an insider’s point of view, we are sort of smug.  We know we have the best and we are not necessarily inclined to share it.  From an outside point of view, if more managers knew how successful employee ownership can be within a company, there would be a lot more.

JMK- We met the enemy and it is us.  So some of the fault lies with us – we know have this cool thing and we celebrate it, but we keep our light under the bushel.  You are also right about the second point – we need a more effective vehicle to communicate this to managers.  We are not trying to take anything away from them, we are only trying to give them something. Karen, before we close out, just a little plug for the Association, have you felt your membership has been beneficial?

Karen-Yes, absolutely.  Just being able to mix with other enthusiastic employee owners is contagious. 

JMK- No one should ever underestimate the power of being with others who share your passion and enthusiasm.