How to Make the Most of a Decrease in Stock Value
January 2003Let's face it: for many companies, 2002 wasn't a banner year, and neither was 2001. With the 2002 "valuation season" kicking off, the question is: how do you communicate the ESOP's benefits when value declines?
First, avoid these common traps:
- Sugarcoating the truth to protect people (paternalism)
- Shading the facts to protect management (acting out of fear)
- Believing employees (a) don't want to know, (b) don't care to know, or
(c) can't understand the information (all assuming too much).
1. Compare ESOP Performance to Other InvestmentsPeople commiserate with the neighbors about their dwindling 401(k) balances and rightly so. In 2002, all the major indexes were down, big time. How far? The Dow Jones Industrials fell 16.8%; the S&P 500 beat that, crumbling 23.4%; and the NASDAQ Composite outperformed both them with a spectacular 31.5% collapse. Mutual funds were in the bag too: according to Lipper, 96% of the individual funds it tracks lost money in 2002. How'd your ESOP do compared with these abysmal results? Show 'em.
2. Benchmark Against Your IndustryIf your stock value is down, so, most likely, is its peer group. Go beyond the market indexes by providing this information in graphic form. Let employees know the strengths and weakness of your competitors and then challenge them to measure how their firm stacks up against the "bad guys." Many employees have little knowledge of industry conditions. They may be pleasantly surprised at how well you are doing relative to the competition.
3. Honestly Face the Brutal TruthGood to Great author Jim Collins argues that great leaders face the brutal facts. To build a great ESOP company, you must do the same. If performance is off, explain the reasons why value has decreased. Is it the market? The industry? The customers? The competition? This may sound like common sense, but to paraphrase Will Rogers, common sense, alas, just isn't too common these days.
Be honest and realistic in your explanation of the "whys." Don't wallow in pessimism, but avoid unwarranted optimism. Treat employees like the adults they are. As owners, they deserve to hear the good and the bad. By candidly sharing the brutal truth, you're building credibility, loyalty and commitment to the firm's future success.
4. Describe the Company's Business PlansJust don't share the brutal truth and leave people "in the dark" about what the company is doing to change it. Share business plans and explain your vision for the company. Answer the burning question: where is the business headed? After all, someone is profiting from this downturn and others are positioning themselves to capitalize on the market when things improve. Tell employees what the firm is doing and how they can help it succeed.
5. Implement a Process to Regularly Discuss the BusinessIf you don't regularly discuss the business results, people are using their own gauges (like trucks leaving the docks, overtime worked, phone calls received) to measure the company's success. These homespun yardsticks become the fuel that powers the rumor mill. You can squash rumor-mill misinformation by starting a business-education process that provides them with real measures of success.
Sharing specific, targeted information will increase employees' understanding of the company. Operating numbers from a streamlined profit and loss—no more than six or seven lines, maximum—is one place to begin. If the thought of sharing this generates a Pepto-Bismol moment, pick some non-statement operational measures. You could show average order compared with last year or expenses as percentages, rather than the actual numbers (see my column Is Open-Book Management Dangerous? for more practical tips about sharing information).
Make sure you share the information consistently and provide people with reference points so they can understand the numbers' importance. Take it slow, but don't stop with sharing: get people discussing the numbers and taking concrete action to improve them. Making the company more profitable is everyone's job, not just the leader's.
6. Recognize That It's a Marathon, Not a SprintWhether performance is good or bad, it's critical that employees understand how the ESOP operates and its long-term nature. It's time to revisit ESOP 101. This is also a good opportunity to get employees more involved in explaining your ESOP. Connect ownership with your firm's strategic plan to demonstrate how the company is working to build wealth, not cooking up a fly-by-night, dot com scheme or another accounting scam.
Remind people that they don't invest in the ESOP; it is earned as they work. That's unlike the 401(k) where they ante up their own cash to receive a benefit. Despite some recent negative media reports, people do better in ESOP firms. For example, a 1998 Washington State study showed that the average value of retirement benefits in ESOPs was almost three times that of non-ESOP firms.
7. Maximize the Value of Your Most Important AssetsPeople are the foundation of your firm's competitive edge. Technology can be purchased, plants can be built, locations can be bought and innovations can be reverse engineered into commodities. The only things your competition cannot duplicate are your people and your firm's culture. Your people have the customer relationships, product knowledge, market experience and unique skills that differentiate your company from the competition.
When employees are educated and informed about the ESOP and business, they take steps to help their companies succeed. When they work in an atmosphere of mutual trust and respect, they gladly help their firms outdistance the competitors. They are your most important assets because you treat them like it.
The upside of a downturn in value is that you have people's attention. You can use the opportunity to build loyalty, trust and commitment by educating employees about the benefits of being an ESOP company. Or you can miss it. Up or down? The choice is yours.
About the Author
Jim Bado of Workplace Development Incorporated has worked with employee-owned businesses since the late 1980s to communicate ESOP ownership's benefits. His practical experience includes rolling out new ESOPs, ownership and business education, ESOP committee development, leadership coaching, and strategic planning in an ownership environment.