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Value-Based Management:
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Work in most companies today follows the "scientific management" philosophy of Frederick Winslow Taylor. Writing in 1911, Taylor proposed that systemizing efficiency should be the primary focus of corporate managers. He declared:
Frederick Winslow Taylor
Unfortunately, Taylor's system turned the worker into a disposable human tool, a worker-for-hire, a wage serf. As satirized in the classic movie "Modern Times," where Charlie Chaplin actually becomes a mere cog in the assembly line, Taylor's system dehumanized the worker and the culture of work, pitting workers against technology. Taylor was also oblivious to another danger inherent in his system: it left ownership, control and the distribution of profits in the hands of a small elite of managers, time-study engineers and owners. His system offered once self-reliant workers higher wages in exchange for their loyalty to what many consider a modern form of feudalism. Most companies today still operate according to Taylor's top-down vision of the workplace. However, the advent of robotics, advanced informational systems, and the globalization of production, marketing and distribution is forcing a basic shift in how we view the role of the worker and the nature of the workplace. Because of global and technological change, companies are recognizing that their survival and success will require changes in the way they "do business." More and more, they are seeking new, more flexible ways of rewarding and motivating their workers while controlling costs and delivering ever-higher levels of value to their customers. They are also realizing that these objectives are impeded by the adversarial nature of the surrounding economic and cultural environment, a by-product of Taylor's philosophy of work and the inherent instability of the wage system. Businesses are coming to see that what is needed is a new way of thinking. This new way of thinking would not reject the critical role of systems, but would redesign systems to put people first. It would create a new management approach that rehumanizes the workplace. It would shift power, responsibility and control over modern tools and advanced organizational systems from the few to every person affected by the process. The new system would combine principles of equity (justice and ownership) with principles of efficiency, to raise the performance of an enterprise and its workers to their highest potential, in order to better serve their customers and other stakeholders. Instead of tapping into the wisdom, knowledge and creativity of only a few, the new system would recognize the advantages of drawing out and combining the wisdom, knowledge and creativity of every worker. Some of the most progressive private sector firms have begun to implement successful new approaches for motivating workers, improving productivity and quality, facilitating changes and maintaining continuity in their organization's culture. One comprehensive approach, developed by the Center for Economic and Social Justice (CESJ) in Arlington, Virginia, is called "Value-Based Management" or "VBM."
Simply put, VBM is a business philosophy and management system for competing effectively in the global marketplace, based upon the inherent value, dignity and empowerment of each person-particularly each employee, customer and supplier. As a customer-focused "service" philosophy, Value-Based Management (VBM) is built upon a shared set of core values. As a management system, VBM offers a logical framework for designing a company's structures and processes to instill an ownership culture that enables the organization to carry on its mission most effectively. Value-Based Management follows the market-oriented theory of economic justice first advanced by the ESOP inventor Louis Kelso and the philosopher Mortimer Adler. The Kelso-Adler concepts underlying VBM reveal a systematic approach for enabling each member to: 1) participate fully as a worker and owner in the company, 2) receive a fair distribution based on what he or she contributes to the company as a worker and owner, and 3) organize with other members to correct problems or defects in the system affecting participation and distribution. (See chapters 4 and 9 in Curing World Poverty: The New Role of Property, John H. Miller, ed., Arlington, VA: Center for Economic and Social Justice, 1994.) Value-Based Management marries the quality, educational and participation aspects of Total Quality Management and Open Book Management, with the equity and ownership concepts underlying employee stock ownership plans (ESOPs). VBM provides a structured system for diffusing power down to the level of each person in the company. VBM also offers workers an opportunity to participate as first-class shareholders in the company's equity growth, and in monthly and annual profits on a profit center basis. A VBM system typically incorporates an employee stock ownership plan (ESOP), individual and team performance feedback (i.e. frequent and formula-based cash profit sharing), ownership education and sharing of financial information, and structured participatory management and governance. VBM also reinforces within ongoing information and education programs, a broad understanding by all employee-shareholders of the interdependency among every person, department, and profit center in serving the customer and competing in the marketplace. Experience has shown that where reinforced by a Value-Based Management system and culture of ownership, workers become empowered to make better decisions, discipline their own behavior, and work together more effectively as a team. Because each person contributes, risks and shares as an owner, as well as a worker, VBM helps unite everyone's self interest around the company's bottom-line and corporate values.
Value-Based Management calls for a new philosophy of leadership. It holds that an "authentic" leader sees him- or herself as a teacher, as well as the ultimate servant. A true leader is one who empowers others to realize their hidden potential, not one who rules by fear or refuses to be accountable to others. VBM is catalyzed by such leaders; but it is developed and sustained from the ground-up. A well-designed Value-Based Management system sharpens and crystallizes the leader's philosophy around a set of universal moral principles. Through a participatory, company-wide process, these principles are refined and embedded within the organization, laying the foundation for an ongoing ownership-sharing culture. According to VBM, a leader should always strive to empower and encourage people to be responsible for and make decisions in areas directly affecting their lives and work, and at the level of their competence. Power, responsibility and accountability over policy should be decentralized, to avoid potential abuses which occur when these are centralized or concentrated. Those in higher levels within an organization should avoid making decisions which can be made most efficiently and competently by those at lower levels. Value-Based Management is not village democracy where every decision is voted upon by all members of the company. Nor is it "management by committee." Rather, VBM builds checks-and-balances in the company's governance and accountability system. It protects the property rights of all shareholders, but allows executives flexibility to make traditional executive decisions.
The purpose of Value-Based Management is to help empower people and raise their human dignity and quality of life, both inside and outside the workplace. Its principal economic means for achieving this end is expanded capital ownership. Value-Based Management offers every worker the most effective tools to become a co-owner of the place where he works. The Employee Stock Ownership Plan (ESOP) was created to provide workers with access to capital credit-previously available only to those with significant accumulated assets-and to pay for their shares out of future corporate profits which they help the company to earn. But in terms of Value-Based Management, the ESOP by itself is insufficient. Without a clear articulation of shared moral values and the systematic dispersion of power and accountability in a company, the ESOP can be used as a tool to exploit workers and deprive them of their ownership rights, thus violating the fundamental principles of justice underlying Value-Based Management. In contrast, an ESOP based on VBM principles respects the property rights of every shareholder.
Value-Based Management can also be described as an ethical framework for succeeding in business. As such, VBM balances moral values with material values. VBM's three components of value are realized in:
Within a VBM system, these aspects of value can be implemented in a business by:
V = Q/P where V=Value, Q=Quality, and P=Price
VBM is designed to "institutionalize" shared responsibility, shared risks and shared rewards within the company's ongoing structures and processes. The key management areas affected by the VBM transformation process include:
It has often been said that building an ownership culture is more of an ongoing process than a single event. One example of how various elements of Value-Based Management are being incorporated in this process can be seen in the case of Allied Plywood Corporation. Allied Plywood Corporation, a 100% employee-owned company headquartered in Alexandria, Virginia, can sum up the secret of its phenomenal success in a single sentence: "Working together to give customers the highest quality service." But what makes this phrase real for Allied's customers and employees, and more than just empty advertising, is Allied Plywood's incentive system, today widely acknowledged as a model of ownership sharing. Underlying its unique incentive system is a value-based philosophy and management system called the "Allied Way." Primarily a wholesale distributor of wood and related products, Allied Plywood was founded in 1951 in Ohio by Ed and Phyllis Sanders, a husband-and-wife team who moved their business to Virginia in 1956. Allied Plywood's business includes selling softwood plywood, hardwood plywood, interior paneling, particle boards, sheathing, kitchen laminates, adhesives, cabinets and hardware, solid surfaces, and hardwood lumber. Their market is primarily new home builders, remodelers, cabinet makers and sign shops, from Baltimore, Maryland to Atlanta, Georgia. To survive in the highly competitive Washington market, the Sanders immediately began sharing profits with employees through a highly motivational monthly and year-end cash bonus system. On September 30, 1977, the company adopted its Employee Stock Ownership Plan (ESOP) as an added ownership sharing benefit. This provided a gradual means for employees to take over the company as the Sanders prepared for retirement. At that time, the Sanders owned 2,920 or 83% of the 3,512 outstanding shares of the company, with the balance held by 8 employees and the company's legal counsel. For each of the next 5 years, the Sanders sold some of their shares to employees through the ESOP, financing the purchases with cash contributed by the company from profits. On July 1, 1982, the Sanders sold their remaining control block of shares to employees through a "leveraged" ESOP, which borrowed the funds from a local bank. Within 20 months the buyout loan was repaid in full. Today, Allied Plywood is a 100% employee-owned company with 99% of its shares held in an ESOP trust for the benefit of employees. Since the ESOP was adopted, the workforce increased from nineteen (including the two owners) to over 194 employees in September, 1997. After the employees took control, the company expanded from its one Alexandria warehouse to sixteen locations in four states stretching from Frederick, Maryland to Marietta, Georgia. From $6 million in sales in 1977 and $6.2 million in the slump year of 1982 when the employees took over, volume has increased to gross sales of $66.5 million in 1997, representing a compound rate of growth of 17.1% over the 15 years following the employee buyout. Productivity as measured in sales per full-time employee is impressive, close to $350,000 in 1997. This record was achieved despite a major slowdown in the home building industry and the normal productivity declines associated with opening up new facilities. Even in 1990, a year of severe recession in the housing industry, productivity was over 17% higher than before the ESOP. Fixed wages are relatively modest compared to those of the company's competitors, but they are only a fraction of total compensation for people working at Allied. For example, variable pay supplements through Ownership Sharing (monthly and annual bonuses plus ESOP benefits) have ranged from a low of 34% to over 300% more than annual fixed pay over the first 20 years of the ESOP. This "cushion" has helped to spread the pain of lean years, so that the pressure for layoffs is radically less than for most U.S. employers. Thus, the Allied team can keep the "family of workers" employed during hard times in the U.S. economy. Substantial discretionary year-end bonuses have been paid almost every year, based on the value of each individual's contribution to the company. Employees generally receive an additional 10% to 25% above their total fixed and variable income in the form of tax-deferred ESOP benefits. Variable compensation (i.e., risk-sharing) has ranged from 25% to 77% of total compensation, while fixed pay, normally the greatest proportion of pay for most workers, has been as low as 23% of what Allied workers received as compensation and benefits. This adds flexibility and job security within Allied Plywood, far greater than with its competitors. Management estimates productivity (sales per employee) to be significantly higher that of the competition. Total cash compensation for Allied drivers and warehousemen in good years is about twice that of non-union drivers, and over a third more than unionized drivers in competing companies. Employer contributions toward retirement benefits for employees of competing companies range from 0% to 15% of annual cash compensation, compared to 10% to 25% through Allied's ESOP. Allied Plywood's return on investment (ROI), a basic measure of financial efficiency, has varied from a low of 42% to a high of 86.7% since the ESOP was established. Because the company deliberately pays out most of its profits to its employees in the form of Ownership Sharing benefits, these profits are added back in determining the "true" after-tax ROI for comparison with traditionally-owned companies, where a ROI of 20% is considered excellent. Since 1982, policy has been controlled by a 5-person board of directors who also serve as the trustees of the ESOP trust, the legal owner of over 99% of the company's voting shares. In December 1997, 30 employee representatives, including the top executives, came together for three and one-half days in a highly structured "Syntegration" retreat facilitated by a team based in Ontario, Canada. Among other major decisions, they agreed by consensus to restructure the board, with three members to be nominated by a broadly-representative Ownership Council and elected on a one-share, one-vote basis by the non-management employees, and three to be nominated by a Management Council and elected on a one-share, one-vote basis by the executives. Those six board members will nominate and elect three "outside" directors to offer a balanced perspective on the board. Day-to-day executive decisions (including hiring and firing, basic compensation and discretionary year-end bonuses) are made by the President and Secretary-Treasurer, with frequent meetings of the Management Council consisting of key management executives and the top manager of each warehouse/profit center. Major investment decisions are implemented only after consultations with all employees. As a result of the Syntegration retreat, an Ownership Council was established as a "grassroots" advisory body to the board. Corporate governance remains generally informal and open, with responsibility widely dispersed at the workplace. Allied operates on the basis of two-way accountability. Employees are accountable to their immediate supervisors for the quality of their work. These evaluations count heavily in year-end discretionary bonuses and promotions. Ultimately, the company as a whole is accountable to the customers. Allied's "Goals" Program allows each employee to measure on a monthly basis how successfully the customers are being served. Monthly bonus checks linked directly to 20% of a profit center's monthly profits give immediate feedback to each employee on the financial ups-and-downs of his profit center. (A decision was made in 1998 to reduce this percentage from 30% in order to increase funds available for annual distributions and to bring fixed compensation levels closer to market wage rates.) "Goals" for determining these checks are posted daily once sales exceed the break-even point for the month. This monthly financial accountability system is reinforced by periodic group meetings, annual bonuses, and individualized ESOP statements reflecting changes in the appraised value of each share and each person's share of annual contributions and total accumulations. All employees who have been on the Allied payroll since the ESOP was installed have accumulated accounts close to or exceeding $100,000. At some point, dividends may be paid on each employee's equity stake to reinforce Allied's Ownership Sharing philosophy. Each person receives an ESOP handbook when he or she first joins the company.
The ESOP is the key to Allied's governance and two-way accountability system, and serves to perpetuate Allied's ownership culture. Allied's monthly profit sharing provides short-term feedback to each employee based on the performance of his immediate profit center. The year-end bonus gives feedback on each worker's personal performance and the company as a whole. The ESOP gives long-term feedback reflected in the value of company shares and the value of the worker's overall asset accumulations. All full-time employees become eligible to participate in the ESOP from the day they are hired. However, they must be on the September 30 payroll to receive an allocation of that year's ESOP benefits. Benefits are in the form of new corporate shares, or shares that the company contributes from treasury. Cash contributions are also made, in order to purchase shares from departing participants, or to repay lenders when large blocks of shares are purchased on credit. Employees pay nothing for their shares. Allied's goal is to contribute an amount equal to 25% of total compensation of all covered employees, the maximum contribution allowed by U.S. law. Each year's employer contributions and forfeitures are allocated to participants' ESOP accounts according to each one's percentage of total compensation from regular pay, overtime, and monthly and annual bonuses. Vesting (or non-forfeitability) is designed to reward long-term service and loyalty to the company. ESOP accounts of those who quit or are fired before three years of service are 0% vested, meaning that when they leave, they forfeit all their accumulated ESOP benefits. Forfeitures of the non-vested part of a departed employee's ESOP account are re-allocated to remaining employees along with new contributions. Upon three years of service, vesting begins at 20%, with 20% added each following year. In year seven, an employee's account becomes 100% vested and is no longer subject to any forfeitures. Those who reach retirement age, become disabled, or die become 100% vested automatically. Vested shares are not distributed to employees until they leave the company. Generally, there is a five-year waiting period for those who quit or are fired. Distributions are made sooner in the event of retirement, disability or death. Normally, the company or the ESOP repurchases the shares of departing employees for cash at the appraised fair market value. A portion of the company's cash contributions are invested outside the company in order to build up a diversified pool of assets, providing ready cash for meeting the ESOP's projected share repurchase requirements. Employees pay no personal income taxes on their ESOP benefits as long as their shares remain sheltered by the ESOP trust. Taxes must be paid when cash or shares are distributed to departing employees, unless the distribution is "rolled over" (immediately reinvested) into another qualified retirement plan. A key result of Allied's unique ownership sharing and incentive system is that Allied employees are generally more opportunity-oriented (entrepreneurial) and less security-oriented than workers in other companies. Thus, fixed labor costs have remained somewhat lower than Allied's competitors, with profit sharing rewards serving to cushion pressures for "layoffs or bankruptcy" during lean months or recessions. It is true that Allied's flexible reward system is more risky and requires more personal financial self-discipline. But Allied's risk-and-reward system also creates more of a team spirit, where all members of the team mutually share hardships and responsibilities, as well as the benefits of working for themselves. Thus, everyone who works at Allied Plywood is disciplined by his own self-interest as well as the mutual interest of all Allied's worker-owners. As such, Allied is a case study of a team of entrepreneurs, working together to better serve their customers.
Certainly there is no perfect company, and like any other company, Allied Plywood Corporation must struggle with the challenges of a changing market, a changing work force, and its own expansion, while remaining true to its core values. Value-Based Management, however, is offering a systematic way of creating, maintaining, and perfecting "the Allied Way" for the good of all its employee-owners. What are the Benefits of VBM for Management? By moving from an autocratic to a more participatory, value-based mode, a company's leadership can spread around some of management's typical operational "headaches." This gives managers more time to focus on the company's long-range, strategic needs, rather than spending most of their time putting out brush fires. What are the Benefits of VBM for employees? A workplace that operates according to the principles of Value-Based Management empowers employees as workers and as owners. VBM creates a corporate culture where work can be more satisfying and economically rewarding. What are the Benefits of VBM for Labor Unions? Just as VBM involves a transformation of the modern corporation, it also involves the transformation of labor unions within VBM companies, offering labor representatives new and more important roles than they have played within the present adversarial system of labor-management relations. Unions can help deliver a higher degree of economic justice and far greater rights for their members than the false security and wage system "crumbs" now bargained for within today's labor-management framework. What are the Benefits of VBM for the Company as a Whole? Experience within a growing number of companies indicates that the more that people's self interests are unified within a management system reflecting the principles of Value-Based Management, the greater will be customer and employee satisfaction. From this can flow increased cost savings, increased sales, and increased profits. By offering solid principles and a logic for building an ongoing ownership culture, Value-Based Management helps to create an environment which respects the dignity of all forms of productive work. VBM recognizes that, regardless of a person's function or role in the company, we are all workers. The success of Value-Based Management comes when each person-from the CEO and supervisor to the machine operator and receptionist-feels that they own and benefit from the VBM process and share in the results as full participants in their company and its culture. |
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ADDITIONAL SOURCES ON VALUE-BASED MANAGEMENT For more information on Value-Based Management and building an ownership culture, contact Equity Expansion International, Inc. at P.O. Box 40711, Washington, D.C. 20016, Tel (703) 243-5155, Fax (703) 243-5935, Email ownco@aol.com. Also see:
Various publications of the Ohio Employee Ownership Center, Dept. of Political Science, Kent State University, Kent, Ohio 44242, Tel 330/672-3028, Fax 330/672-4063, E-mail: oeoc@phoenix.kent.edu Various publications of the Foundation for Enterprise Development, 470 L'Enfant Plaza East, S.W., Suite 7112, Washington, D.C. 20024, Tel 202/479-2706, Fax 202/488-5512, E-mail: dbinns@fed.org, website: http://www.fed.org). |
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P.O. Box 40711, Washington, D.C. 20016 - Phone: 703-243-5155, Fax: 703-243-5935 thirdway@cesj.org (e-mail) |
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