By Brad Mook

In our last post (Skin in the Game) we wrote about the importance of alignment between employees and owners, and how broad employee ownership can create structural and behavioral alignment. We received a lot of interesting feedback and had a number of relevant follow-on conversations, most of which fell into one of two camps: “Yes, and…” or “Yes, but…”. Many of these responses offered nuanced observations, but the foremost takeaways were (a) that employee ownership alone won’t achieve optimal alignment, and (b) that employee ownership isn’t the only path to alignment. Both are accurate. And to be fair, we’ve observed and partnered with several financially successful founders whose firms checked the box as “majority employee-owned“ but where the alignment and glue proved to be frustratingly poor over time, both for us and the founder’s “partners”.

The reality is there are other factors that loom large and matter regardless of the underlying ownership model. Things that create a sense of belief, a sense of belonging and a sense of loyalty. Things that create a sense of shared ownership in the process and especially the outcomes. Things that attract ‘A’ players… and keep them. Things that get the flywheel turning… and keep it turning.

Among others:

  • Vision creates a common cause to rally around and ensures everyone knows where the team is heading. It gives employees a sense of purpose and belonging. Vision is neglected or assumed much of the time.
  • Incentives motivate behavior (good or bad); proper incentives are helpful, while misaligned incentives are one of the biggest Achilles heels in business. Both parented and employee-owned managers are challenged here.
  • Communication allows people to understand and fulfill their roles on the team. It gives people visibility and lets them know where they stand. Covid has made this harder and Zoom-dependent.
  • Resources feed execution and improvement. Cost management is fine, but willingness to invest trumps do-more-with-less, especially in an increasingly competitive industry.
  • Trust enables appropriate risk taking and the freedom to try new things, and creates an environment where employees will support one another and go to the mat to win. Trust is buffeted by poor performance, myopia, insecurity, etc.

These are all ingredients of a strong, healthy culture, which allows employees to focus on their work (as well as the things that are important to them outside their job). We are big believers that both alignment and culture enable execution—the blocking and tackling of everyday processes—and that successful execution is a big differentiator between successful and unsuccessful firms. It is amazing how many firms fall down because poor alignment or poor culture prevents them from doing the hard work well.

Gears won’t work if the teeth aren’t properly aligned.

A crew team can’t succeed if the rowers aren’t in sync. Drunken octopuses don’t win races.

We’ve seen firsthand many examples of misalignment through the years. For example:

  • One-sided internal equity transitions – Sometimes sellers think they should get market or near-market value from internal buyers, since they took the bulk of the risk and created the bulk of the value. That approach doesn’t create true partners. And sometimes the buyers think they should pay nothing or near nothing for the stock, not respecting that the seller already did a lot of the heavy lifting. This disconnect—the unwillingness to either make sacrifice or recognize sacrifice—is one of the primary obstacles to smooth equity transition and lasting partnerships. In contrast, we’ve seen that materially discounted internal buy/sell multiples and seller/corporate financing appropriately balances sacrifice and benefit for both sides.
  • Side deals – These often appear in benevolent dictatorships, typically in the absence of a fair and transparent compensation and ownership structure. In these situations, someone important at the firm inevitably complains about being treated unfairly and the principal quietly sets up a side deal to keep them quiet and preserve the status quo. This works in the moment, but in time it never ends well. Eventually it fosters resentment by all parties…the dictator, the squeaky wheel, and all those that weren’t in on the deal but later found out about it.
  • Lack of transparency – A common pitfall that causes lack of trust is secrecy around the firm’s business metrics. Whether it’s the P&L, business development scorecard or specific client economics, management sometimes feels compelled to keep a tight lid on the firm’s financial information. Perhaps its motives are relatively benign (not wanting non-public information to become public), or perhaps more nefarious (not wanting employees to know how much money is being made at the top because they’ll demand more). But you can’t expect co-owners to act as true partners when they’re kept in the dark; they won’t trust you if you don’t trust them.

The key in all this is being able to take accurate stock of your firm’s condition and—uncomfortable as it may be—make appropriate course correction. Apply the secret sauce of alignment…develop an ownership culture, articulate a shared vision, establish dove-tailed incentives, communicate expectations and realities, provide ample resources, and create an atmosphere of mutual trust. You’ll be surprised what happens.