A Call To Action
Viewed merely from the balance sheet, there is nothing remarkable about Action Instruments Inc. The 11-year-old, San Diego electronics company, which last year turned a modest, $530,000 pretax profit on sales of $15 million, has never produced a major innovation, gone public, or attracted much more than local interest. Even Action's venture capitalist describes the company's best-selling product as "boring" and mired within a slow-growth, "pigpen" market.
But, more important than any consider ation of the bottom line, Action Instruments has produced the rarest of commodities -- a business enterprise founded upon profoundly humanistic principles. "We are building capitalism with a heart," explains Jim Pinto, president of the company which manufactures electronic measurement and control devices. "Our competitors don't have people on their balance sheet. Ours does, and they're at the very heart of our growth."
Long before Theory Z, Transcendental Meditation, and myriad other humanistic management theories permeated the business world, Jim Pinto was implementing his own particular capitalist vision at Action. Since founding the company in 1972, India-born Pinto has built an enterprise in which the distinction between employees and owners is blurred almost beyond recognition. Even now, as he takes a risky move into the burgeoning industrial computer field (see sidebar, page 96), he has no intention of deviating from the central tenets of his nonhierarchical, share-the-wealth philosophy.
"The future of this company is to eliminate the differences between workers, managers, and owners by making them all capitalists," Pinto says, sitting below a photo of a bemused Albert Einstein. "If you own a piece, if you feel a part of this, you do everything to increase productivity. The whole ethos is based on the idea that love is a better motivator than compulsion. We don't have 'yes sahib, no sahib' relationships around here."
At the center of Action's ethos is an almost messianic faith in the power of worker ownership. Almost from the inception of the company, Pinto has assiduously encouraged his employees to invest as much as 10% of their gross income in the purchase of Action stock. Today, almost half of the company's 285 employees are shareholders, controlling some 20% of the company, with its independent field representatives owning an additional 8%.
For most of these worker-owners, the share in the company remains fairly insignificant, but for some managers and long-time employees, Action Instruments's stock already appears to have been an excellent investment. Since 1978, the artificially set in-house price for Action stock has soared from $1.50 to $5.75, allowing even some of the assembly-line workers to garner over $10,000 worth of the company. This price was recently validated when a group of British venture capitalists, seeking to underwrite the company's European operations, invested $1 million at $9 a share.
But even Pinto, who now owns slightly less than half the company's stock, realizes that "share the wealth" is little more than a slogan, unless the company goes public. To accomplish this goal, he has fixed Action on a high-growth, new product-oriented track. "Going public is the goal that keeps us moving. It's the way to make the ownership ethos pay off," explains Steve Peltier, the company's 28-year-old chief financial officer. "It makes it everybody's business to get all excited about new, sexy products like the industrial computer."
Ownership, however, constitutes only one element of Action's quest to foster worker enthusiasm and involvement. Action employees are expected to take an active interest in their investment. An "info center," for instance, supplies all workers with the sort of detailed information usually accorded only top managers at most companies, including weekly statements about profits, shipments, bookings, even the cause of key bottlenecks.
This attitude of responsibility for the company is further engrained through extensive training sessions. Two series of four-hour, four-week seminars focus on such basic attitudes as trying to be "2% better" than other companies ("2% is practical and realistic," says Pinto), not putting off work until tomorrow, and dedication to the company's long-range growth strategy. Equally important, the sessions, taught by company personnel director Cathy Jett and attended by 9 out of 10 employees, stress such basic communications and human relations skills as trust openness respect and interdependence.
Among other principles stressed at Action's in-house seminars is the "barrier," a strict screening process for potential employees. All candidates, for example, are grilled about their sentiments toward teamwork and cooperative ownership. Since they would be supervising other people's work, prospective managers are tested for dedication as well as sentiments. Unlike assembly workers at the company, for instance, managers traditionally have been required to take a substantial pay cut. Some top officials, including the executive vice-president and the chief financial officer, took positions at Action at salaries as much as $20,000 below their previous rates. "How else would we really know they want to be here," asks Pinto, whose $65,000 a year is the company's highest salary. "We don't want to make it easy for people to join. We want people who can look over the barriers -- a pay cut, for instance -- and say, 'Hey, this is a good place to work.' We want people who are dedicated to what we're doing. We are not interested in mercenaries."
Although the "barrier" clearly screens out some qualified candidates, those who remain often become total converts to Pinto's approach. "Even if they threw me out of here tomorrow, I would come away believing in this system," asserts finance chief Peltier, who took a $20,000 pay cut to work at the company. "If Action did not exist, I would have to go out and start an other company like it. Working here is like getting an MBA in human relations."
The obsession with interpersonal relations and disdain for the trappings of hierarchy suffuse all aspects of life at Action. There are few private offices, no personal secretaries, and no reserved parking spaces. Dress is casual -- part of a conscious informality that places all employees on first-name basis. Use of conventional titles and rigid corporate roles is also discouraged. President Pinto's job, for instance, is described on his office door as simply "Miscellaneous."
The reality of the Action belief system is perhaps most evident in manufacturing, the one area in which even the most progressive companies often retain traditional hierarchies. Earlier this year, the company's top manufacturing personnel burned their business cards and eliminated their titles. In place of traditional management roles, they formed OCTA -- Orchestration, Concept, Task, and Analysis -- and moved into a large, common "nerve center" where, working as a team, they coordinate production with inputs from sales, marketing, and engineering.
"OCTA has brought down the barriers in manufacturing," claims Phil Cerasoli, the long-haired, former head of manufacturing who cut his own salary to prove his commitment to the new egalitarian approach. "Where the production and manufacturing managers were at each other's throats, now we work together as equals. We are trying to show that the key is building the company, not getting fancy titles.
One of OCTA's chief benefits, Cerasoli believes, is the freedom it gives Action's assembly-line workers. With supervision kept to a minimum, workers are expected to carry out tasks of their own accord. In addition, they are personally consulted for views on procedures and new techniques. The approach is as popular as it is productive. Theresa Bell, a former employee at National Cash Register Inc., believes Action has found a way to make assembly work palatable. "At NCR, if you wanted to leave your seat you had to ask permission. It was three sick days, here's your paycheck, and that's it," the 34-year-old assembler recalls. "Here, they don't stand over you. You work because this is your company and you want to make money. It's like a family."
Assembly-line supervisor Ruth Valentini credits the convivial atmosphere for an employee turnover rate that is less than half the norm for electronic manufacturing operations.
"Compared to every place I've worked, this is paradise," says Valentini, who grew up working in the hot, stuffy woolen mills of Woonsocket, R.I. "People feel at ease and do a better job. It's like I'm self-employed -- everybody is. I tell people what to do, but then I leave them alone. It's like everybody has their own little business -- yet we all work together."
When explaining the origins of the Action ethos, Pinto points to a wide range of intellectual sources, from the technological millenialism of Alvin Toffler's Third Wave and Marilyn Ferguson's New Age-oriented Aquarian Conspiracy to the hard-boiled capitalism of Ayn Rand. But, despite these conceptual trimmings, the ethos essentially reflects the experience and odyssey of James J. Pinto.
Born 45 years ago of Brahmin ancestry in Bangalore, a city in south central India, Pinto learned social responsibility at an early age. His family had long been active in the Catholic church; both his great uncle Humbert Pinto, the first Indian Jesuit provincial; and his cousin Jerome d'Souza a Jesuit priest and one of India's first delegates to the United Nations, provided role models of moral leadership. Today, three of Pinto's five sisters (he also has four brothers) are nuns.
But a strong sense of social responsibility constitutes only one part of Pinto's heritage. His father, Albert, the rebellious attorney son of a successful tile manufacturer, wrote an antiestablishment book and composed several, still-popular Hindi songs with such titles as "Rosalie" and "Johnny Walker Whiskey Bottle." From him, Pinto acquired two important traits -- an appreciation for foreign cultures, particularly British, and a penchant for being a maverick.
These influences and his own natural curiosity prompted pinto, upon graduating from college with a physics degree, to move to England in 1959. After working at a large British electronics company until 1962, he teamed up with a young Israeli engineer and started his own company, Kent Precision Electronics. The company prospered briefly, then began to suffer severe cash-flow problems. After three difficult years, Pinto reluctantly sold Kent to MTE, a large British company, where he became a manager.
The highly regimented business culture at MTE made a strong impression on the young Pinto. "I didn't know who I was back then, but I knew I didn't like that sort of system," Pinto recalls in the living room of his cramped San Diego house, which he shares with his wife, Rosa, who is a former Action employee, and their two children. "I was turned off by the hierarchy at MTE," he says. "You know, sherry before lunch in the executive dining room and don't talk to the fellows on the line. I just couldn't be pompous enough for them."
Disgusted with the class consciousness of British business, Pinto moved to the United States -- which the young engineer idealistically thought of as the "land of Hewlett-Packard, Harvard, and MIT" -- in 1969. Although his long-term goal was to start his own company, Pinto's young family needed more than dreams. Taking a job briefly at Burroughs in Los Angeles, Pinto soon moved on to Bissett-Berman, a San Diego aerospace company, where he rose quickly in the management ranks. Specializing in the application of electronic technology to military ordnance, the company did a land-office business during the Vietnam War.
As the nation started reducing military expenditures, Bissett-Berman began to trim its work force. Pinto, whose job it was to do the laying off, simultaneously planned his own departure and looked into opportunities to start a company. The year was 1970; the idea was to develop a plan and then put it into action -- hence, the company's name. Anxious to avoid the mistakes that had doomed his earlier venture, notably poor financial and marketing management, Pinto contacted some of the most admired men in U.S. electronics, including David Packard; Bill Hewlett; and John Fluke, founder of John Fluke Co., one of the nation's top instrumentation companies.
To his amazement, each of these men gave at least an hour of his time and offered sage advice on how to develop a successful company. Fluke stressed the "three p's -- people, product, and profits." Hewlett urged Pinto to "understand the numbers." But it was David Packard who most impressed Pinto. Asked what he thought was the key to running a successful business, the Palo Alto entrepreneur said simply, "People."
But as Pinto was slowly picking up the elements of what would become the Action ethos, he still lacked the product around which to build his company. He toyed with the idea of developing a 5 1/4-inch floppy disk, but decided to stay within the more familiar realm of electronic instrumentation. Ironically, another Indian, Sirjang Lal Tandon, shortly afterwards employed the 5 1/4-inch concept to lay the foundation for one of high technology's most successful companies.
Pinto's innovation proved a far more modest one, both technically and commercially. Working in a spare bedroom of his home in 1972, he developed the prototype of the first Action Pak, a small, electronic plug-in measurement and control module. Within a few months, there were three employees working in a small office building. That first year, the company sold some $70,000 worth of Action Paks.
Toward the end of 1972, Pinto teamed up with retired Honeywell Inc. vice-president Ray West and asked him to become the company's chairman. In West, Pinto found a "guru" who could teach him the fundamentals of new-product development and marketing. A 43-year veteran of the instrumentation industry, West had played an important role in Honeywell's transformation from a company involved in the manufacturing of mechanical and pneumatic devices to one involved in electronic technology, and its emergence as one of the leading companies in the electronic-controller market. West saw the Action Pak as the logical replacement for the traditional, heavy electrical instruments then commonly used to control and measure basic industrial processes.
"Jim was always too impatient, but I liked his product and his style," recalls West, who at 80 now plays only an advisory role on Action's board. "I told him not to be awed by experience, that some people can be in the business for 21 years and have the same experience 21 times. He would succeed as long as his product kept serving real customer needs."
West's prodigious connections also helped open doors for Pinto at such blue-chip companies as Dow Chemical, Exxon, BASF, and Armco, which make up some 80% of the market for instrumentation giants like The Foxboro Co. and Honeywell. Process engineers -- particularly those running huge, $500-million oil refineries or petrochemical plants -- are an understandably conservative lot, reluctant to part with proven instruments, even if they are outdated and overpriced.
To break down this resistance, Pinto, following West's advice, resorted to novel sales tactics. Cathering a group of these engineers, Pinto would take out an Action Pak, stomp on it, and then blithely plug it in. When the little, $125 plug-in module not only survived the abuse but also performed better than the engineers' more delicate, far more costly instruments, they began taking Action Paks seriously. Pinto's offer of a three-year guarantee -- unprecedented in the industry -- further cemented the credibility of both the Action Pak and its manufacturer. Today, those same engineers constitute some of the most devoted customers for Action Paks and their related progeny, Transpaks, Thermopaks, and Visipaks.
"When Action first came in here, I thought their units were too damn cheap to work -- they were one-third the price we were paying," says Tom Murray, senior process instrument engineer at BASF's massive Geismer, La., petrochemical plant. "But the Paks really did work and Action offered that three-year guarantee -- hell, if I asked Foxboro or Honeywell for three years, they'd laugh in my face."
Thanks to converts like Murray, Action has sold over 500,000 units to some 15,000 customers. Applications for the devices have been as varied as measuring the temperature of boilers and steel furnaces, controlling the liquids in a vat of petrochemicals or ketchup, and running the conveyor belts in a granola-bar factory.
As its products became accepted, the company grew rapidly, with sales soaring from $250,000 in 1973 to $7.4 million in 1980. Yet even this spectacular growth, exceeding 40% annually, did not satisfy Pinto. His goal was to become a Fortune 500 company, with a short-term objective of reaching $100 million by 1987. Yet Pinto realized that to achieve his goal, he would have to broaden his technology, market, and capital base. In-short, he needed someone who could teach him the "capitalist machinations."
Setting out to find such an individual in 1980, Pinto came upon Silicon Valley venture capitalist Don Valentine. In some ways, the brusque, thoroughly pragmatic Valentine and the idealistic Pinto seem the oddest of couples. But in Valentine's tough market focus Pinto perceived the almost perfect counterbalance to his sometimes excessive optimism. And in Pinto, the venture capitalist -- who since 1973 has helped launch such companies as Tandon, Atari, Apple Computer, and Altos Computer -- saw the kind of leader central to the creation of a successful, high-growth enterprise.
"I like people who, when you ask how big a company they want, they say $500 million," Valentine explains in his Menlo Park offices, bedecked with pictures of his heroes, Butch Cassidy and the Sundance Kid. "That is the guy who will leap tall buildings in a single bound and stop speeding bullets. We make our money on big, big dreams."
Finding Pinto's dreams big enough for his tastes, Valentine invested some $500,000 in Action, which gave him control of 13% of the company and a seat on the board of directors. From the start, Valentine pushed Pinto to break out of the "pigpen" market of industrial instrumentation -- where the growth rate is little better than the gross national product's -- and enter the new, burgeoning field of industrial computers.
Pressed by his new colleague, Pinto spent $500,000 in 1981 to buy the rights to a basic industrial computer developed by Dynabyte Corp., a Milpitas, Calif., company, whose office-oriented product line had little room for an industrially oriented computer. With the new machine, Pinto and Valentine hope to build an "industrial Apple," a $5,000 basic processcontrol computer, that would displace the far more expensive machines supplied by such companies as Foxboro, Digital Equipment, Honeywell, and, more recently, Analog Devices.
Some of Pinto's other acquisitions, however, proved decidedly less promising. In 1980, for instance, Action paid Wheelabrator-Frye $1.1 million for Hardy Scales Inc., a weighing-systems company with a long record of meager sales growth. Convinced he could revitalize the San Diego company with the Action ethos, Pinto poured time and resources into trying to infuse the 75 or so Hardy employees, who had suffered three ownership changes in less than a decade, with Action's spirit of cooperation and orientation toward fast growth. He also hoped Hardy's line of scales would neatly complement Action's product base.
However, the Hardy experience has proven anything but neat. From the beginning, Pinto's top managers and advisers opposed the acquisition. They contended Hardy would sap valuable resources from more potentially profitable areas such as the new industrial computer. They also doubted that Hardy's demoralized work force would respond to an ethos that had been evolving at Action for almost a decade. Indeed Hardy, despite the tireless efforts of Pinto and other Action staffers, continues to limp along at around $4 million in sales. As a result, it has been on the sales block for the last eight months.
"Jim came in with Action models and Action philosophy and the people at Hardy greeted him with blank faces," recalls Phil Cerasoli. "Most of us here said not to do it, but Jim was stubborn. He was too stubborn, too determined to make it big."
Slow to recognize his mistakes, Pinto soon compounded them. Distracted by the new computer project and the attempt to enliven Hardy, Pinto doggedly pressed marketing director Dave Carlson to continue producing Action Paks on a fast-growth schedule -- despite predictions of a recession. "Jim's the kind of guy who snaps his fingers at a recession and says there's a recession only if you believe there's one," Carlson says. "I told him we'd be lucky to have 10% growth, and he insisted we keep producing for a 40% rate. He ended up killing our profits and laying off 40 people, after promising never to do that."
The recession, which proved stronger than even Carlson anticipated, cut deeply into both Action's sales and its organizational unity. After eight uninterrupted years of 40% annual growth, 1982 sales registered a sluggish gain of only 5%, to $15.5 million.
Discouraged by the poor performance board members, including Don Valentine and instrumentation consultant Jim Miller, began calling for a shake-up of top management. In addition, several key managers, including manufacturing's Cerasoli and executive vice-president Harry Sundblad, soon fell into conflict with two company veterans, Dave Carlson and Bob Meijer, the soft-spoken head of engineering. Both Carlson and Meijer were accused of failing to meet the company's goals. Perhaps even more serious, they openly questioned the wisdom of the Action belief system. Pinto, a man who usually encourages debate and dissent, was suddenly faced with a potentially debilitating conflict between true believers and highly placed renegades. Reluctantly, the man with "Miscellaneous" on his door started to swing the traditional chief executive officer's axe.
Bob Meijer, the first to go, believes his firing was more a reflection of doctrinal differences than a failure in performance. "To be a successful manager at Action, you have to be close to Jim," charges Meijer, now a top engineer at Massachusetts-based Analog Devices Inc., a major Action competitor. "He's more than a slight guru. If you don't fit into the guru mold, you don't survive. It might have worked at $7 million a year, but as the company got bigger, it needed a different kind of leader. Jim just couldn't let go."
The conflict with marketing man Carlson continued into last spring. Reluctant to terminate the five-year-company veteran, Pinto eventually fired Carlson in May, after sharp disagreements over marketing personnel and strategy.
Although the departure of the two veteran managers has left Action short-handed, some observers, including Don Valentine, believe the firings suggest that Pinto may be developing a new entrepreneurial maturity. "Over the past three or four years, Jim's become more pragmatic. I've watched him take the steps he has to take to improve his company's position. His transcendental management is certainly becoming more realistic," Valentine asserts.
One sign of this new pragmatism is Pinto's recent decision to expand management. Aware that he cannot enter the highly competitive industrial-computer field with only his current management, Pinto has signed on executive recruiter Don Zee, hoping he can locate the marketing and technical personnel needed for the new computer endeavor.
But Zee, a veteran of the instrumentation industry, fears Action's ability to attract top talent will be sharply limited by the company's pay scale. The lower salary levels rule our 75% of the qualified candidates "A lot of people out there simply don't understand what they're doing at Action," Zee observes. "To most of them, the ethos means nothing."
Yet, despite pressure from Zee and others, Pinto is unlikely to significantly alter either his approach to executive salaries or his overall management philosophy. Over the past decade, he has built a company with a special set of beliefs: to abandon it would undermine all of Action's current key personnel. Indeed, the members of Action's management team -- mostly in their late twenties or early thirties -- appear more than willing to continue working harder, for less money, in order to preserve way of life.
"We are determined to live up to our standards," explains Harry Sundblad, 37, who took a $5,000 pay cut as a senior accountant at Price Waterhouse to join Action seven years ago. "It took a lot of effort to build the company into what it is. And we'll continue to succeed if we keep to the basics."
With 1983 sales running at more than 20% above last year's, Pinto believes his faith in the Action ethos will soon be vindicated. But whether Action can meet its goal of becoming a $100-million company without high-priced talent or the other accoutrements of hierarchy remains an open question, even in the mind of Jim Pinto.
"If it works, everyone will say I'm a genius. If it doesn't, they'll call me a flake or a dreamer, "Pinto reflects as he gazes out at the sun-drenched San Diego hillsides. "In the long run, it boils down to how well you do. It's OK to be a maverick, but if you're a maverick, then you'd better damn well be right."