Adopting an Ownership Mindset

Alana Muller 00:09
Welcome to Enterprise.ing, a podcast from Enterprise Bank & Trust that's empowering business leaders one conversation at a time. We'll hear from different business leaders about how they found success in cultivating their professional networks and keeping them healthy and strong. I'm your host Alana Muller, an entrepreneurial executive leader whose primary focus is to connect, inspire and empower community. We at Enterprise Bank & Trust thank you for tuning in to another episode.

Alana Muller 00:09
Hello, and welcome back to Enterprise.ing podcast. I'm delighted to have with me today, Keith Davenport. Keith is a community leader who has dedicated his career to investing in people. He joined The Missouri Center for Employee Ownership or MOCEO, as its first full time Executive Director in 2021, after serving in a number of program management roles with Johnson County government and Johnson County Community College. Keith, welcome to Enterprise.ing podcast.

Keith Davenport 01:08
Thanks, Alana. Glad to be here.

Alana Muller 01:10
I'm so glad. And we should let our listeners know that you and I have actually done some work together in the past. So it's wonderful to have you here in this capacity as well. So thank you.

Keith Davenport 01:20
Yeah, it's fun to reconnect.

Alana Muller 01:22
I love that. I want to get us started by just learning a little bit more about MOCEO. And having you explain really, what is the concept of employee ownership?

Keith Davenport 01:32
Yeah, let me start with the problem we're trying to solve, and then I'll talk a little bit about how we got here. So in Missouri, right now, about 52% of the privately owned businesses are owned by somebody who's over 55 years old. So you think about what that means for the economic landscape in Missouri, in the next 10 years, probably over half of the businesses are going to go through an ownership change.

Keith Davenport 01:56
And if you look at national statistics, around somewhere between 80 and 90% of business owners don't have an exit plan, if they don't have kids who are going to take over the business for them, the businesses that actually go to market only about 20% of those actually sell. And so we're really trying to think about what are the options that we could tap into to keep those businesses in Missouri, so they don't sell to private equity and move out of town, or a strategic buyout where the business close.

Keith Davenport 02:24
And so employee ownership is really an option that business owners have, that allows them to continue their legacy in their town, lets their employees own the business in some pretty creative ways that the employees don't have to come up with the money to buy out the owner. There's some great policy and structures around that makes it accessible to them. And then they get to enjoy the benefits of closing the wealth gap by having that business ownership component, and then it keeps that business and the job and the community and helps that local economy. So that's really what we're doing.

Alana Muller 02:58
It's so cool. You know, what it reminds me of, and you tell me if this makes sense or not. But what it reminds me of, is when people in a community, professionals in the community, will want to keep college graduates in their home community. And to overcome what people have sometimes referred to as a "brain drain" where they send, you know, intelligent young men and women off to get their college education. And then they leave their hometown, or they leave their home state and never return. And, you know, trying to come up with ideas and strategies for keeping them in the community. This is sort of that same concept. But with companies. Am I right?

Keith Davenport 03:36
Yeah, that's exactly right. So when we're talking to economic development organizations, or chambers of commerce, local government, state governments, we're really leaning into conversations around business and job retention. And that's, that's really what we're trying to bring, is just a new tool to that place, when we're talking to business owners. It's really about taking care of their employees, and then keeping and maintaining the legacy that, you know, they've oftentimes put decades into this small business.

Keith Davenport 04:04
And this just allows that to keep going after they've retired. So depending on who we're talking to, we use a little bit different language, but it's the same sort of component of something that you love that you want to keep in the community.

Alana Muller 04:14
Yeah, great. That's so great. So how can you leverage the advantages of an ESOP [Employee Stock Ownership Plan] is specifically related to employee retention as you're describing cost control and even an ownership mindset. So whether you're employee-owned or not, how can you do that by, sort of, encouraging people to stick around and showing those benefits in terms of expense mitigation? I guess I would say.

Keith Davenport 04:38
Yeah, I just was talking with an organization today, who was asking me some similar questions. And I told this story because I think it really helps capture what we're talking about here. The question they asked was, how does employee ownership help a business be more resilient in market turns? Which is something that a lot of folks are talking about right now.

Keith Davenport 04:59
And I gave this example from SRC Holdings in Springfield. And they have, you know, they're a manufacturing company, they distribute their products around the country, and one of their employees, who's in charge of like the plastic wrap around to their, cases or crates of things as their shipping -- you can tell that I don't work in the space, and I don't have all the right, the right terminology.

Keith Davenport 05:20
But that person, she's an employee owner, they're 100% ESOP, 100% employee-owned, and she felt empowered to do her job. She's an employee owner. And she was recognizing that they were paying a lot of money for this plastic wrap. And so she took it upon herself to go out and look at alternative options. And she found another company that actually could give them more of the product for less money, and ended up saving the business. I don't remember if it was 10s of 1000s, or hundreds of 1000s, annually in overhead costs.

Keith Davenport 05:49
And that's just a great example of a way that, when you can leverage an ownership mindset where you have your employees engage in thinking like an owner…they feel empowered to act on ideas, and figure out ways that their individual job can impact the bottom line for the business. And that's just one example. And I could go on with dozens more.

Alana Muller 06:10
That's amazing. Are you saying, is there, well, your focus is specifically in the state of Missouri, so are you seeing an improvement in retention when companies do move to ESOP? Are you seeing a specific reduction in turnover, so to speak, or in a reduction and days for open posts?

Keith Davenport 06:29
Yeah, so there's all kinds of metrics almost any way that you might measure a business success. An employee-owned business outperforms its peer companies in the same industry, of not employee-owned. So there's a couple of different organizations that do research about this on a national level.

Keith Davenport 06:45
So NCEO, the National Center for Employee Ownership is one of those, Rockhurst University has a whole center around researching this, Project Equity out of California is another one. What we saw during the pandemic, and outside of the pandemic, is that they're less likely to have layoffs, longer employee tenure, higher median household income, greater year-over-year business profit growth, employee-owned businesses closed at a lower rate than non-employee-owned businesses through the pandemic. We're seeing overall, the retention numbers are all there as well.

Keith Davenport 07:20
And so, it just, almost any way you measure, just like I said, an employee-owned business outperforms a non-employee peer. That is to say, though, that it's because there's a good business, right? So if you have a bad business, or if you have a bad work environment or bad leadership, becoming employee-owned, just makes them an employee-owned business with bad leadership and bad business. So you know, there's other components there too, and employee ownership is not a magic bullet. But, there's a lot of things you can leverage in the employee ownership space that can really help that business grow.

Alana Muller 07:52
That's really cool. And you talked about these organizations that are doing, sort of, metrics on a national basis. I know you're focused on the state of Missouri. But are there different rules and regulations sort of enacted by state? Or is it general? Is this generally the case across the country and what you're describing?

Keith Davenport 08:11
Yeah, so there's federal public policy that really helps with employee ownership across the country. And there's some state level things that change too. So nationally, when you talk about an ESOP, so this would be employees of businesses likely to have more than 20 employees, they're doing probably at least 10 million in revenue annually, to for it to make sense, to be an ESOP.

Keith Davenport 08:29
Smaller of that would be a worker cooperative is an ownership model that would work for smaller businesses than that. But for ESOPs, for C-Corp, ESOPs, when the business owner sells their company to the trust that's going to manage this ESOP for the employees and become that employee-owned piece, they get capital gains, tax incentives, tax advantages from that sale. What is more likely, though, is it's an S corp, that becomes an ESOP.

Keith Davenport 08:56
And then whatever percentage of the company is employee-owned, they actually don't pay any federal income tax on that percentage of the company. And so that frees up cash to pay the debt from the transaction. But then after that's paid off, you have a business that has a whole lot more cash flow, to be able to be really nimble in the market. And then most states, it depends, it varies from state to state, but oftentimes, they also don't pay state income tax as well. In Missouri, there's actually just right now some legislation that's being finalized, hopefully in the state legislature that would reauthorize a state level tax incentive that just sunset in December. And so there's a lot of folks across the state, including the Missouri chamber, that's working to try and get that reauthorized.

Alana Muller 09:44
Wow, that's so great. You gave that great example of the woman who realized that she could help the company, recognized cost savings by using a different supplier for a key product, sort of, leveraging that concept, so ESOP is a way to preserve company culture and engage in employees themselves in the well being and the future of the organization. Can you share any tips or observations that any business leader could apply to engage employees and help shape the workplace culture?

Keith Davenport 10:14
Yeah, I think wherever you look at trying to figure out employee retention issues or recruitment issues, there's a few pieces that stick out everywhere that are consistent. You know, you want a good management team, but some of them are, employees want to know that they have a future with the business, they want to know the way that their role fits into the overall mission of the business.

Keith Davenport 10:37
Trust in senior leaders tends to be a recurring theme. And one of the ways that you can help with all those components, even if you're not employee-owned, is really thinking about doing some training around financial literacy for your employees, but not for the business. So just some really simple, you can go as far as open book management, where you share all the financials for your business with your employees, or you can do that in much smaller pieces, of just, let's look at our department, how does our department play into the overall revenue lines and expense lines for for the business? And then each of your jobs? How can you help control or impact this, and what that can do in many ways.

Keith Davenport 11:17
One is most employees think that their CEOs make 10 or 12 times as much as they actually do. And so by sharing some numbers, that helps just create more trust that it's not quite that much of a divide, and they also can see where everything's spending, but then they can take some ownership of that and see how their work can actually play into the overall success of the business. And then just like anywhere else, like leaning into, since employee-owned-businesses are less likely to have layoffs, they have higher turnover, being able to help shift that into future career planning and leadership development with your employees too.

Alana Muller 11:54
Okay, that's super helpful to understand. And it really does, sort of, speak to the fact that anybody can use these principles. Setting aside, maybe, LLCs, or sole proprietorships, what if a company, or is it such a thing that a company could be too small for an ESOP? And if so, what options do those kinds of organizations have?

Keith Davenport 12:13
Yeah, so ESOP's have ultimately become a qualified retirement plan that owns the business. And so they're regulated by the Department of Labor, Department of Revenue, because there's regulations, there's often some more cost involved in that, in both the transaction and the upkeep. And so for businesses that are smaller -- so maybe have less than 15, or 20 employees -- doing less than about 1.5 EBITDA, or less than 10 million revenue, depending on who you talk to, or how you want to shake that, ESOP's often don't make a lot of sense for them, because they just don't have the cash flow to set up an ESOP.

Keith Davenport 12:48
And then to maintain that. So oftentimes, for those size businesses, we talk about worker cooperatives, which in Missouri, we're really familiar with agricultural cooperatives. We have the rural electric cooperatives, it's a really similar model, except instead of the various farmers being in a cooperative, it's the employees themselves that actually own the business then. And so instead of being a retirement plan, the employees pay a membership fee to become a member of the worker cooperative.

Keith Davenport 13:18
And then every year, they get what's called “patronage,” which is their share of the annual profit. It's put in a capital account for them, then if they leave the business or retire, they get to cash out the capital account. And that's a much lower cost to set up. It's much less regulated. So you can set those up for a much more reasonable level for a business that has 10 or 15 employees or it's, you know, your Main Streets, small town, that's maybe doing a few $100,000, or a million dollars revenue total in a year, it makes a lot more sense.

Alana Muller 13:48
That does make sense. I mean, it almost sounds like, it's not, it's almost like getting dividends, but the payout doesn't come until you select to cash out, or you select to leave the co-op, is that an accurate way to think about it?

Keith Davenport 14:02
Yeah, that's exactly right. So you might get every year, you might get some of that in cash, because it's taxable income, so just enough to cover your taxes, and the rest goes in that capital account. And then that, you know, builds year after year after year. And it's a really, it's a really significant benefit. But then you also get the benefit of, if the business were to get bought out or something like that, you end up getting the part of the profits of the business selling. And in a worker cooperative in particular, everyone employee, owner, gets one vote to vote on a board of directors. And so it's a lot flatter of a structure and it's a more democratic workplace, just by nature.

Alana Muller 14:39
It is an interesting structure. And it does give people a way to at least participate in the decision making for the group. So I think that's actually really interesting. It strikes me that family-owned businesses would find this appealing that you know, instead of it being one patriarch or matriarch from a family, maybe, maybe all of the family members can participate. Can you talk a little bit about family owned businesses that do convert to become ESOPs and what a succession plan might look like for them?

Keith Davenport 15:14
Yeah, absolutely. So there's a business out of St. Louis called CK Supply. And their executive vice president is a member of our advisory board and helps us with our work across the state. He's a third generation leader of this business. They work in welding and supply dry ice. And so his grandfather started the business, his father took it over. But when his father was leaving, they decided they wanted to make some shifts.

Keith Davenport 15:41
So they've made it a partial ESOP. You don't have to make your business 100% employee-owned all at once. So they're a partial ESOP. They just converted a couple of years ago, then Brad, who is this person I work with, who's the vice president, the third generation, he's still on board and part of that management team. He has two siblings who are a little bit less connected with the day-to-day of the way that's managed and worked.

Keith Davenport 16:03
But that's how they decided they wanted to be able to give more to the employees and make sure that that business continues on. Because they work in a space where most of these smaller companies, locally-owned, family-owned, are getting bought out by private equity, which that's not necessarily a bad thing, but it can be hard when they leave the state or leave the community. So Brad's father wanted to make sure that their business continued, and that the employees they've worked with for a long time get to share in that and so they converted to a partial employee ownership model. And then the third generation gets to stay on a management manager team and then still hold some of that private stake as well.

Alana Muller 16:39
So cool, Keith, this is fascinating. I love this. But you yourself, you've been in business or in the business community for a long time, you've done a lot with academics. I'd love to dig in a little bit more to your background and talk a little bit about. Is there a great piece of business advice that you've received? And maybe, I mean, even something that led you to this position that you took over?

Keith Davenport 17:02
Yeah, so actually, when I first took this job, I was starting to work my network, you know, move to a new space trying to help launch this new nonprofit. So I was trying to work my network had to make all the connections we could, and sat down with a friend of mine who has worked in nonprofit development for a long time. And the piece of advice he gave me that has been so helpful is do what you say you're going to do. And he just went on to point out just how hard that is, and then how much that sets you apart to follow through on your commitments.

Keith Davenport 17:34
And those who work with me know that there's probably some times I've done better at that than others. There's definitely been a sense of when I've been able to be consistent, to follow through with commitments I've made in a meeting, or when I first make an initial connection with somebody, that, that goes a long way. And it's been surprising to me sometimes how much trust that builds so quickly, just simply doing what you said you're going to do. So that's advice that can really play out anywhere.

Alana Muller 18:00
I mean, isn't that amazing? Well, first of all, you know, since you know, I'm the networking girl, I love hearing that you leveraged your network to figure out what was next. And when you talk about that secret sauce of actually doing the thing that you said you were gonna do as the piece of advice, isn't it, it's almost ridiculous how few people actually can do that. And I don't think it's because people don't intend to, I just think that we get busy and we forget. And life gets challenging and all these stressors. And so I think that when people actually follow through and do the things that they commit to doing, they're buying social capital that money cannot purchase. And so the fact that you realize that as you did, and with the advice of a great mentor, I think is remarkable.

Keith Davenport 18:50
Absolutely. And to your point like that, that social capital is so significant and surprising. It's surprising how far just following through can get you in a relationship or a commitment in that way. Because I think that, you know, really, the number one currency in these relationships, and networking is trust. And you build trust so much by just being consistent and consistently showing up in the same way day after day. And so once you find people that you can trust, you want to keep working with them. And so being able to position yourself in authentic ways, in that way, really helps build those long lasting relationships that you can take when you move across industries in the same region, from place to place. So, definitely was essential.

Alana Muller 19:36
Well, and I suspect in the world of ESOPs, that, you know that following through on commitments, honoring your commitments is essential. And when you talk about building trust, you know, it seems that if you have a group of employee owners, they have to learn to trust one another. Otherwise, this does not work, because as you described earlier, an ESOP seems like a really good idea for so many reasons, but if it's bumping up against a poor management team, against a poor company culture, it's not going to be the thing that saves the organization.

Keith Davenport 20:08
That's absolutely right. That's absolutely right.

Alana Muller 20:11
So just a fun question that, you know, I ask all of my guests, and it is this: if you could meet with one person, let's say you're gonna go grab a cup of coffee, who would it be? And why?

Keith Davenport 20:20
Sure, so I told you pre-show that I've spent a lot of hours trying to narrow this list down. Because you know, having coffee with people is a lot of fun. And so I decided that I would go with Martin Luther King Jr.

Alana Muller 20:34
Excellent choice.

Keith Davenport 20:37
I think that, aside from elected officials, he’s probably either the most, or top 10 most influential people in America and American history in this last century, and as far as shaping and shifting our future. And then, also, I feel like one of the most sort of misquoted or misunderstood, so thinking about today's issues that we face, everyone likes to pull quotes from Martin Luther King Jr. and say they support whatever their position is. And I just want to get his take on the way that his quotes are being used and hear firsthand what both his experience back then was, and then what his perspective would be on our modern day situation.

Alana Muller 21:18
That's really cool. I totally agree with you. He really is one of the most quoted humans and so just the opportunity to sit down with him and ask him what he thinks about what's going on today. It would be pretty fascinating wouldn't it?

Keith Davenport 21:30
Yeah, it sure would. Then, of course, we have some similar backgrounds, too. And, you know, I used to be a pastor and political activism, he is kind of in that space, too. And so, I feel like if you're gonna have a mentor working in that space, he would be the best one to have.

Alana Muller 21:44
Yeah, he's a genuine, inspirational leader. And that's very cool. Well, Keith Davenport, I have loved having you. It's been wonderful to reconnect with you. Where can our listeners go to learn more about you and the Missouri center for employee ownership?

Keith Davenport 21:58
That would be moceo.org. So that's M-O-C-E-O.org.

Alana Muller 22:04
Greatest name ever. I appreciate that. Keith Davenport, thank you so much for joining us on Enterprise.ing podcast. Thanks for joining us this week on Enterprise.ing.

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