Let's start with the basics for you, because you're actually doing it rather
than talking about it. What is stakeholder capitalism?
Well, stakeholder capitalism for me is finding a way to not only deliver great
outcomes for shareholders, but doing right by workers and the climate.
And I have to say, there's tons of brilliant people working on climate
issues. Obviously, it's critical.
There's not enough people focused on labor.
And so that's really my passion. A lot of it has to do with how I grew
up. My dad was a construction worker for 40
years, earned an hourly wage and really taught my sister and I around the dinner
table what it's like being an hourly worker.
You know, you don't have a voice. Nobody listens to you.
There's no incentive alignment and you have no stake in the outcome.
So that ignited a passion in me from a very early age to think about these
labor issues. And then when I became an investor, you
know, wow, what an opportunity, because you're responsible for all of these
companies with all of these many employees.
And if you can cascade change through a variety of a number of companies, which
private equity is well suited to do, you can impact, you know, thousands, if not
hundreds of thousands of people. So that sounds fine.
But you'll forgive me if many of us who don't understand private equity the way
you don't associate that approach with private equity.
We tend to think you go and you buy the company you strip out cause you leverage
it up, you sell it. Yeah, well, but private equity is not
perfect. Capitalism's not not perfect.
But this is a superior way of operating a company in every respect.
You can align incentives not just of the senior team, but of all of the
employees, help them create wealth for themselves and create a better culture.
I mean, if you can figure out a way and we think we're on the right path here to
have employees less likely to quit their jobs, more engaged on the job, you've
got a better opportunity to deliver on value creation initiatives, which is the
core of private, but the core of private equity is.
Transformation, take a good business, make it great, and you're not going to
be as effective as you could be in that effort.
If you don't have everyone aligned. So that sounds great.
Also sounds fairly simple. Is it when you actually do it?
Because often the implementation is where the tricky part.
Yeah, it's incredibly difficult. Let me just define the program.
The program that we've been working around, around employee ownership is
about much more than handing out stock. If it's just handing out stock, then
we're in a compensation discussion, which is important, but that's not going
to change cultures. As my friend Doug Seidman always says,
you can triple people's compensation and not get ownership behaviors, which I
think is very true. So we are taking ownership as the
foundation, as an ethos. And then on top of that, we are building
a robust employee engagement effort. Teaching financial literacy, opening up
the business plan to all employees, financial information, sharing
financials with all employees, and teaching basic corporate finance so they
can understand the information being shared with them.
All of this stuff, taken together, is what can move a culture.
And to your point, it's hard. You know, day one.
People say, I don't believe it. I don't believe I'm gonna have a voice
in my work. I don't believe this DAX ever going to
be worth anything. To your point, I've read about private
equity in I'll believe it when I see it. Another challenge is CEOs are
overwhelmed. A lot of CEOs will say to me, OK, let me
just get this straight. You want me to double my profits?
You want the financials by the 12th of the month.
The metrics package by the 15th of the month.
You want me to decarbonise add diversity to the board, change the way I recruit.
So we had diversity deep into the organization.
And now you want teach financial literacy, drive employee engagement,
make everyone an owner in the business, you know?
Come on, Pete, what are the real priorities?
And so CEOs are overwhelmed. The unlock is in this.
This enables all of it is for CEOs to understand if you do these last four
things right. It's going to make everything else
easier. So, no, it's not easy, but it's worth
the effort. Does it also hurt their cost structure?
When you start talking about sharing and copying things like that, does that
actually add to their cost structure or do you offset in compensation and the
salary and benefits? Well, one important thing to understand
is this is never a trade for wages and benefits.
So we are. This is not about pushing risk onto
workers. So we're not asking workers.
Here's some stock. Can we take some comp and benefits back?
It's always incremental. It's always free.
We're not asking workers to invest out of pocket.
So to your question, is it. It's not an incremental fixed cost.
It's it's sharing in upside. So it's there's no payout if there's no
value creation. And in our experience, this pays for
itself when it's done well. And I don't want to make it sound like
it's easy when you're patient and you put years of effort into this.
This pays for itself many times over. Let me give you an example.
So public company that we bought in 2013 was called Gardner Denver.
So we took it private. In 2013, there were six thousand
employees at the company out of six thousand people.
Eighty six people had ownership, which is what we see.
Typically, it's 1 to 5 percent. They had never done an employee
engagement survey ever. Massively high quit rates.
When we started measuring engagement, 20 percent was the way we measured in the
20th percentile, according to Gallup. We brought in a new leadership team,
totally changed the way the company ran. We shared openly the business plan
financials. We made huge improvements and things
like worker safety. And when I give you the results, I want
to stress this took us almost 10 years. But the engagement scores went from the
20th percentile to the ninetieth and the quit rate went down 90 percent.
So we were hiring 3000 fewer people every year.
Think of the benefits of that. Take us into one specific example.
I've read about which is CGI. Tell us the story of CAGR.
OK. CSI Overhead Doors is a manufacturer of
garage doors in central Illinois. We bought the business in 2015.
We were the fourth private equity owner. So when we bought the business, there
was a lot of why would you buy smart people?
I've known this for 20 years. What could possibly be done with CHF
overhead doors, a garage door company? Dun Sound that exciting, that software
business? Why are you guys doing this?
And what had never been tried was engaging with the entirety of the
workforce to transform the business operations.
So we had a good company that could have been exceptional.
And so this took us almost eight years, but over the course of eight years,
create an ownership culture. So gave ownership to every employee,
taught financial literacy. We brought an Operation Hope, a
nonprofit foundation to work with us on that, shared the business plan, shared
financial information, had quarterly owner meetings and steadily over the
course of these seven and half, eight years transformed the business
culturally and operations. So the IBEX margins, the profit margins
of the business over that period time went from about 20 percent, very solid.
For building products company to 36 percent, which is like a software
business, people have said there's no way you can get to that level of
profitability and how that happened was a lot of small things that the workforce
did that kuma ve added up to something big.
Reducing scrap, driving productivity, et cetera.
Now, at the end of this, and you really have to see a video to understand the
power of this, employees participated in an amazing outcome.
Our investors in this deal in a garage door company made ten times their money,
which is the best deal KKR has done in 30 years.
When you hear the personal stories and you see the emotion in this program,
that's when CEOs see that in the costs and say, I do this for my people.
We've got to we've got to try this program.
So that sounds fascinating and very encouraging.
Are you seeing some uptake with some of the really big multinationals?
Because it doesn't have to be for companies that are bought by for PE that
you'd have this transformation. Right?
I can imagine a big manufacturing company or a big consumer Covid saying,
you know, maybe we should learn something from that.
Well, I'll give you one example which Bloomberg wrote about.
The CEO of Harley-Davidson called me and said, look, I've been brought in to turn
Harley Davidson around neocon sites. He's the guy who turned Poom around.
And he said the challenge is we don't have the right relationship with our
labor force and our union. And so can you work with me and our
board to figure out how can we roll this program out?
We get those kinds of calls frequently and ownership works.
Now, to say, can you guys help us? This is an interesting idea.
I wanna explore it. How do you structure these programs?
How do you communicate them so they're effective?
And then the most important thing is how do we take ownership and create it
become haven't been ethos, not just here, some stock.
How do we change the culture?