KKR wins by treating workers more like owners
Read more: What does Nucor see in garage doors? An opening
Thanks in part to air conditioning, but also to a methodical, data-driven assessment of when and how injuries occurred, the rate of incidents to report to the Occupational Safety and Health Administration dropped by 58 % during KKR’s investment. The following year, CHI employees chose to spend their million dollar annual budget on a cafeteria offering healthier food options. The following year, it was better rest rooms in the newly air-conditioned factory. The final installment was used to fund an on-site health clinic that saves employees in the rural community the 45-minute drive for simple checkups and prescriptions. CHI was the first company where KKR instituted this annual employee-focused spend, but it is replicating the model elsewhere.
The program is an offshoot of Stavros’ passion project of putting equity in the hands of rank-and-file workers with the goal of making those employees more invested in the operational health of the company and reducing income inequality. At CHI, the company’s 800 employees became owners of the business alongside KKR. These equity grants were in addition to, not replacing, salaries and benefits, and were free to those earning less than $100,000 a year. The result is that everyone in the business is in line for a bargain in the Nucor sale. KKR is poised to earn 10x the original equity invested in CHI, making the return one of the highest ever for a buyout in the United States. Meanwhile, the average hourly factory worker or truck driver will receive a payout of $175,000 on their stake, while some long-time employees will receive up to $800,000 before taxes. One of the main reasons the payouts will be so high is due to the operational progress made by CHI: revenue more than doubled on an organic basis, while earnings before interest, taxes, depreciation and amortization nearly quadrupled.
Watch: Should workers be owners too?
By any measure, CHI is a huge success story for the Capital Grants for All concept. KKR has extensive share ownership programs in 25 companies and counting. It’s now the “only way to do business in the United States,” Stavros said. Whenever I hear about this effort, my first thought is, “Why aren’t more companies doing this?”
Stavros started a foundation called Ownership Works, which aims to encourage grassroots stock issuance and provide a forum to share best practices. There are more than 60 partners, but the vast majority of them are financial and professional services companies that will provide programmatic support, labor rights advocates, foundations and other private equity firms that will are committed to deploying similar programs in some of their portfolio companies. The number of partner public enterprises is only two. It is manufacturer Ingersoll Rand Inc., which issued $100 million in stock to employees in a 2017 public offering for former Gardner Denver after a takeover from KKR and another $150 million from grants in 2020, and motorcycle maker Harley-Davidson Inc., which cited KKR as inspiration for a decision last year to distribute stock to 4,500 employees, including hourly factory workers.
Widespread ownership can work in a range of industries, but manufacturing is particularly well suited because there is generally less turnover at the hourly employee level than, say, in retail or restaurant businesses. With growth being hard to come by in many corners of the industrial world, companies rely heavily on productivity improvements, which tend to be best achieved by those working in the factory rather than by executives in head office. who typically receive stock payments. The industrial sector is also experiencing a particularly acute labor shortage that companies were complaining about long before the latest pandemic disruptions.
More and more CEOs of state-owned manufacturing companies should think about off-the-shelf ways to boost productivity and retain employees. But I’ve asked a number of them over the past two years if they’d ever consider issuing stock to their factory workers, and the response is usually a mixture of refusing to answer, pointing to other programs like 401(k) matching this are nice but not able to generate the same kind of wealth, or offer myriad excuses as to why broader equity grants won’t work for their particular workforce.
“It’s going to have to change a lot of minds and hearts and build case studies to get people to think differently,” Stavros said. “We are here for the climate. If you’re writing a climate sustainability report, you won’t see ROI metrics. Nobody cares. When it comes to work, for some reason, we’re always stuck in that “show me the numbers” mindset.
To be fair, the success of these large equity distribution programs is not as simple as flicking a switch. They require a significant amount of paperwork, an investment in proper personal financial education for staff, and a redesign of training to help workers think through decisions like owners. At CHI, as part of the equity payout of the Nucor deal, the 800 workers will receive a year of prepaid financial coaching through the Ayco arm of Goldman Sachs Group Inc. and tax preparation services from Ernst & Young. Private equity also has the advantage of more concentrated decision making, and the boards of public companies tend not to be big risk takers.
But allocating a certain percentage of profits each year to a workplace improvement budget that employees have a direct say in involves a fairly minimal amount of financial capital and effort on the part of the company, but a potentially significant gain in terms of workforce engagement and quality of life. This seems like a very easy first step for companies that say they care about doing the right thing for society and are seriously considering investing in a more engaged and productive workforce. There are probably countless other factories across the country where trappings like air conditioning and on-site health clinics could make a big difference.
More other writers at Bloomberg Opinion:
• CEOs have been silent on equality during Covid: Chris Hughes
• CEO pay ratio rule is a failed experiment: Michelle Leder
• Walmart truckers even shoot junior bankers: Jared Dillian
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering transactions and industrial companies. A former M&A reporter for Bloomberg News, she writes the newsletter Industrial Strength.
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