Profile of an EOY winner. The competitive advantages of an employee-owned company.
Cecil Ursprung had a theory: if you gave workers some power, they would repay the company a thousand times over in performance. Reflexite's 240 employee-owners -- this year's Entrepreneurs of the Year -- have proved him right
"These folks are really innovators. In manufacturing, in sales, in organization. They built the business." -- Ken Iverson
Not to be too ham-handed with the symbolism, but a mile or two from the aging downtown of New Britain, Conn., is a pair of factories that could star in a documentary on America's economic past and future prospects. One is the huge former home of defunct New Britain Machine, now dark and silent, "500,000 square feet and one security guard," as a neighbor describes it, mute testament to the decline and fall of yesterday's industrial economy. The other, right next door, swollen with people and equipment and activity, is the modest plant of Reflexite Corp., a growing and profitable technology-based business competing in a dozen world markets, an untidy token of a brighter tomorrow.
"It's companies like Reflexite that we hope will be the rebirth of Connecticut," says David Edgar, who left a fast-track position with a Fortune 500 corporation to join the venture as vice-president of human resources. Connecticut, hell -- this company is helping the whole United States. Between 1986 and 1991 Reflexite's sales doubled and doubled again, last year topping $31 million. Its work force nearly tripled; profits rose almost sixfold. Though it competes head-on with giant 3M Corp., it has expanded into Canada, Europe, and Mexico. By decade's end it's likely to be a $100-million company operating around the globe.
But what's striking about Reflexite isn't just the growth, which has been surpassed by plenty of well-known flashes in the pan. It's the remarkable sense you get when you visit the bustling plant that -- well, that this company doesn't do business in the ordinary way. Reflexite seems to achieve the virtues of Japanese management with purely American methods. It somehow taps and channels huge amounts of entrepreneurial energy without coming apart at the seams. It's a company whose unusual structure seems to protect profitability, in boom times and slow periods alike. If it were publicly traded, it's a company -- believe me -- you'd want to double-mortgage your home to invest in.
Dave Edgar already has. So have a lot of Reflexite's other employees; as a group and as individuals, they own 59% of the company's stock. That, as we'll see, is not an incidental fact.* * *
Reflexite's story begins with Hugh and Bill Rowland, Connecticut-born brothers who graduated from Yale University in 1940 (Hugh) and 1943 (Bill). They were engineers by training, and Bill in particular had a gift for coming up with new plastic materials and products. In the late 1960s he invented a new method for producing retroreflective material. ( Retroreflective means reflecting light back to its source; it describes the material that coats highway signs and barricades, the tape affixed to life preservers and fire-fighting gear, and the like.) The method -- simple in concept but a bear to execute -- involved molding thousands of microscopic prisms onto every square inch of a plastic sheet. The Rowlands patented key aspects of the process and began learning how to implement it on a commercial scale.
In 1983, with the brothers' young company doing a profitable $3.5 million in sales, 3M paid a call. Would the Rowlands be interested in selling? And if so, did 42 times earnings sound like a fair price?
By some measures it would have been a graceful exit. Hugh and Bill were then in their sixties, and the Reflexite board was worried about succession. The brothers stood to clear about $5 million between them from 3M's offer. There were only two obstacles. The would-be buyer was obviously more interested in Reflexite's technology and patents than in its factory and would promise to keep the New Britain plant open for only a year. That didn't sit well with the Rowlands, old-school Connecticut Yankees who believed a company had a responsibility to its community. Then there was this fellow Cecil Ursprung, out in Michigan, whom Hugh Rowland had just signed up as Reflexite's next president and heir apparent.
Not that Ursprung had a personal stake in scotching the deal. Quite the contrary: he hadn't moved to Connecticut yet, and his newly signed contract included some stock options, which would vest immediately if control of the company changed hands. So he could make a killing without even starting his new job.
But what was a killing compared with a vision? "I had a very, very strong feeling that this was one of those one-in-10,000 opportunities where a really great company could be built," Ursprung says. "And I truly felt, even with a company I respect as much as 3M, I wasn't sure that anybody could nurture this technology the way it needed to be nurtured, and make it blossom, unless they lived with it every day and had to depend upon it for their livelihood." Giving an impassioned speech along these lines, Ursprung persuaded the board to give him a shot. A few weeks later he began the delicate task of taking over from the founders.
You might not, at that point, have expected anything too unusual from the new chief. Born in Texas in 1944, he had decided by age 16 on a career in business. He had a bachelor's in business from Baylor University and an M.B.A. from Washington University in St. Louis. He had done stints in the corporate world, first with Anheuser-Busch and then with Container Corporation of America. Most recently he had been a marketing executive for a small company near Detroit.
But Ursprung was also, in his way, a child of the 1960s, not quite the conventional executive he might have seemed. Working in Chicago in 1968, he had gone down to the courthouse at lunchtime to hear antiwar leader Tom Hayden and the other Chicago Seven defendants harangue the crowd. Later, living in Ann Arbor, Mich., he was business director of a fledgling environmental group and chairman of the local mass-transportation authority. Ur-sprung's interest in business never wavered, nor did his faith in free enterprise. But he found himself wondering if traditional top-down management, left over from the days when immigrant workers might have no more than a strong back to offer an employer, was the best way to run a company in the late 20th century. Employees today were better educated. They had more to contribute. They wanted more than money -- they wanted to be committed to something, and they wanted some power ("That's the right word," he muses, "some power") over the decisions affecting their work lives. Give them that and they would repay the company a thousand times over. It wasn't, Ursprung felt, a matter of altruism. It was a matter of smart business.
In his first couple of years at Reflexite, Ursprung could see that the sale issue hadn't been laid to rest; the founders needed liquidity, after all, and Hugh Rowland still seemed to delight in entertaining would-be buyers. So Ursprung began thinking about assembling a buyout group himself. Soon, by coincidence, both he and Hugh began hearing about employee stock ownership plans (ESOPs), legal devices that allow a company's employees to buy out its owners. Thanks to some then-recent legislation, ESOPs could provide both buyers and sellers with hefty tax breaks. Ursprung studied up, then asked the brothers to let him put together such a plan. The Rowlands agreed.
Talk about your win-wins. Over the next few years the ESOP bought a little stock, borrowed some money, and bought more. Hugh and Bill got their liquidity, along with the knowledge that their company would remain in New Britain. (Hugh died in 1990, but Bill, the company's vice-president of research and development, still comes to work.) Not only did Reflexite's employees keep their jobs -- they wound up with a stake in the company.
And Cecil Ursprung, now one new owner among many, found himself with an unparalleled chance to test his ideas about management -- and to see if he could create the world-class competitor he thought Reflexite could become.* * *
Louis O. Kelso, the iconoclastic economist who invented ESOPs, hoped to transform society by making workers into capitalists. But most of the several thousand companies that have implemented the plans in recent years have had more modest ambitions. Public corporations set them up to ward off raiders. Family-business owners may want only the tax goodies. ("I know a couple of companies that have ESOPs, and the employees don't even know it," laments Ursprung.) Even generous-minded chief executives frequently view ESOPs as just another benefit -- equivalent, say, to a 401(k) -- and install the plans without changing anything else in their companies.
Too bad for them. All such moves, it turns out, are roughly like buying a Ferrari, then keeping it in the garage while you drive the same old Chevrolet. For what Cecil Ursprung has demonstrated over the past several years is that employee-owned companies can do things other businesses can't. Take the ESOP concept seriously -- create what might be called a culture of ownership -- and you'll be able to move faster into new markets, to protect yourself from competition, to run leaner and thus more profitably. CEOs of most ESOP companies haven't figured out those advantages yet, which is why their companies don't automatically stand out from the crowd. Ursprung has -- which is why his company does.
What are the connections? Well, pay a visit to Reflexite's busy New Britain headquarters. Once there, you won't need long to grasp either the culture Ursprung has created or the capabilities that culture provides him.
One fact is immediately apparent: this is a company that pushes employee ownership, if not to the limit then at least to a point somewhere in the vicinity. Big-company ESOPs hold 5%, maybe 10% of the stock? Reflexite's owns 34% and will eventually hold a majority. Dozens of individual employees, moreover, hold another 25% outside the ESOP, bringing the total of employee-owned stock to 59%. The median ESOP account comes to more than $50,000. Long-term employees' accounts are significantly larger.
No Reflexite employee is likely to forget the stake he or she holds in the company, if only because it's reflected in supplementary paychecks. Employee shareholders get an "owner's bonus" once a month, 3% of the company's operating profit divvied up by shares. In a good month the bonus can add several hundred dollars to an experienced worker's income, in a bad month nothing at all. Shareholders also get annual dividends amounting to 20% of pretax earnings. A middle manager with more-or-less typical shareholdings last year would have received about $1,000 in dividends.
Other reminders of ownership abound as well. Every letterhead carries the legend "An ESOP company . . . where employees are owners." The numbered inspection cards workers leave in boxes of packaged material identify them as Reflexite co-owners. Bulletin boards and handouts report the latest monthly results and owner's bonus calculations; on bonus day a white flag bearing the letters ESOP flies outside the building. Quarterly plant meetings provide regular information about the company's performance and priorities. At the annual meeting -- typically the same day as the company picnic -- employees vote for the board of directors. (Like most corporate shareholders, they have so far dutifully supported management's slate.)
Money, hoopla, financial information, voting power -- few ESOP companies take so many pains to make stock ownership more than just another benefit. Employees at those other companies return the favor and continue to regard themselves as wage earners with one more benefit. At Reflexite, by contrast, a feeling of proprietorship -- and of a long-term stake in the company -- crops up in conversation before anyone asks. "This was always a family-type company, a friendly place to work," says Pat Napolitano, a quality-control supervisor who joined Reflexite under the Rowlands. "But now! It took us a while to understand we actually owned part of the company ourselves. But that part gets more exciting every year, especially for longer-term employees."
The crux of employee ownership at Reflexite isn't the good feelings it generates; plenty of companies have a mellow atmosphere and a mediocre profit-and-loss statement. Rather, it's the way the structure and culture mesh with Ursprung's strategies and ambitions for the business. This is not, after all, just a sleepy little shop in Connecticut. Under Ursprung's guidance it has nurtured a technology that 3M, one of the premier product-development companies in the world, still has not replicated. It has expanded into vast new markets all over the world. In the last several months it has weathered a brutal sales downturn, keeping profitability intact and readying itself for still more new markets. Thanks to employee ownership, Ursprung has been able to undertake moves and maneuvers in all these areas that CEOs of conventional companies wouldn't dare try.
A technological edge. We Americans think of technological development in a linear fashion: you invent something, you patent it, you market it. The Japanese don't make that mistake. Americans may have invented the VCR and the memory chip, but it was Japanese companies that painstakingly accumulated the know-how necessary to manufacture them at ever-higher quality and ever-lower cost. Ursprung hasn't made that mistake, either. Rather than rely on his company's aging patents (which technology vice-president Jim Seely acknowledges are no longer "particularly strong"), he has created an in-house technical-development capability that effectively insulates Reflexite from direct competition.
The capability takes a variety of forms. Reflexite engineers and technicians themselves design and build the big multimillion-dollar machines that produce the prismatic material. Each new behemoth incorporates dozens of process improvements that will never appear in any patent. R&D specialists such as Dave Martin -- an inveterate tinkerer known for pulling up to the plant in a big red dump truck -- draw on years of hands-on experiments to transform the material into new products, some of them complex 8-layer or 10-layer chemical sandwiches. (Martin's latest: a reflective collar for highway traffic cones that shows up orange in the daytime, bright white at night.)
Getting the tooling, the machinery, and the chemicals to work together -- they don't always -- is a matter of high craftsmanship. "It's not a push-pull, click-click kind of operation," says U.S. manufacturing manager Chuck Woodard, frowning as he watches the second of two production interruptions in a 20-minute period. "Which means we've got to have the hearts of the employees in order to make this thing run. There are so many little things the individual has to pay attention to." Capturing employees' hearts (or managers', for that matter) is not among most U.S. companies' strengths. Reflexite, with its tangible and intangible reminders of joint ownership, has a built-in edge. "I take more interest in my work, knowing that if I screw up, money goes out the door," says recently hired mold technician Mike Ardito.
In Japan wages rise steeply with seniority. Reflexite's ESOP builds loyalty in a similar fashion: the longer you stay, the more shares you get and the more your nest egg grows. So experienced employees almost never leave, and the company almost never loses their know-how. "Dennis over there has been here almost 8 years, Joe here 13, Teresa 12, Lester at least 9," says Woodard, ticking off the names of the skilled operators busily fixing the foul-up. "The ESOP concept really appeals to the more senior employees."
Small companies competing with big ones typically maintain low profiles and are content to snap up crumbs of business the giants leave behind. Not Reflexite: its technological capabilities have turned it into a self-confident David looking to fling a few rocks at 3M's Goliath. "What we're trying to do over there is bring the brightness of our product up," says Woodard, pointing to yet another version of the reflective traffic-cone collars. "Then we'll build specifications with the states for our brighter collars -- and kick everybody else out of the marketplace."
Building markets. "If you're a technology-driven company like ours," muses Ursprung, "you must be very, very good at finding applications for your technology in the marketplace." In principle the chore doesn't seem so difficult. Reflexite -- the material -- can be used on everything from traffic markers and Coast Guard buoys to stick-on smiley faces. It's as useful in Germany as it is in Georgia. In practice, though, getting products into so many markets is both tricky and time-consuming. Each niche has its own technical problems, its own distributors and customers. Many involve the arcane and political process of government-specification writing. Confronting those issues domestically is difficult enough. But how on earth has Ursprung managed to take international sales from a little more than $1 million in 1986 to some $15 million last year?
That, obviously, is a question the CEO has been waiting for; he breaks into a rare grin. "This 'member company' idea is really hot. We've tested it; we've honed it. It works. And we're going to build on it."
Member company is Reflexite-speak for wholly owned subsidiary. The technique: find an entrepreneur in the host country who knows the industry. Set him (so far they're all men) up in business, providing capital, product, and technical expertise.
Then turn him loose. "You're running your own company!" says an ebullient Dave McDonald, managing director of Reflexite Canada. "To say there's an entrepreneurial opportunity here is an understatement." McDonald and his counterparts in the United Kingdom, Germany, and elsewhere are free to nose into any market that seems promising, even to set up specialized product-fabrication facilities if appropriate. (Reflexite U.K. already has its own.) All have P&L responsibility, their bonuses reflecting their bottom lines. All also hold equity, not in their subsidiaries but in the parent company, to make sure their long-term interests coincide with Reflexite's.
It's this entrepreneurial structure that's driving the skyrocketing sales. Reflexite U.K. alone racked up $5.7 million in sales after only three years of operation. Maybe more important, the structure provides the company with a ready-made model for expansion. Deals in Mexico and eastern Germany were recently consummated. The Far East beckons. "Five years ago business outside the United States constituted 19% of our total," says Ursprung. "Now it's half. In another five years it's probably going to be two-thirds."
What makes the aggressive entrepreneurial expansion work, though, is Reflexite's ownership culture. The far-flung marketers place huge demands, numerous and usually urgent, on the New Britain shop's R&D and production systems. McDonald, for example, was recently working with a customer to develop reflective pylons for helicopter landing pads in the Canadian wilderness. It was a potential $100,000 order, with sales of up to $1 million possible in the future. But there were critical engineering problems to solve. Could New Britain help? Could it do so right away, please?
In most companies such requests from distant salespeople wind up low on the home office's priority list. Who's McDonald anyway? Why should employees drop what they're doing to help him out? In other companies moving those requests along requires in-house politicking or a direct order from top management. At Reflexite the process is simpler. How much will the job contribute to the shared bottom line, either immediately or in the future? If a persuasive case can be made -- a million-dollar market, for instance -- everyone instantly sees an interest in pulling together, as happened in this case. "Gary Gauer [in product engineering] really made that pylon job fly," says McDonald.
Profitability. In ordinary times -- which for Reflexite means times of rapid growth -- employee ownership feeds profitability in a lot of little ways. A general willingness to run lean, since every new body dilutes the equity. Salespeople who cut sharper deals because (as one marketer puts it) "they're worried about return on investment, not just making this sale." Grass-roots efforts to rationalize systems and procedures. Dave Correa and Andy Smith, both shop-floor managers, take the initiative to reorganize packaging, eliminating bottlenecks and freeing up packers for other work. Chemicals handler Bob Frechette, on the job less than a year, figures out how the company can reuse solvent, thereby cutting the hazardous waste it must dispose of; he even works up a full cost-benefit analysis, mostly on his own time. Simple initiatives -- which most companies never see.
But even for Reflexite, the past year has hardly been ordinary. Because of the recession -- and particularly because of sharp cutbacks in state highway construction and maintenance -- domestic sales have been well below plan, and profitability has been threatened. Conventional companies respond to such a downturn in one of two ways. They ignore it and risk losing money. Or they lay people off, instantly shattering any illusions employees might have entertained about everyone being in the same boat. At Reflexite, indeed, a few of the managers figured layoffs were inevitable.
Ursprung was not among them. "I asked them, would they lay off one of our production machines? Tear it apart and put it in a warehouse and hope they could find all the parts and get it running again when business came back? Now let's talk about people! You want to take people's jobs away -- and maybe in six weeks or six months call them back and see if you can win their commitment again?"
He smiles, a little wanly. "I didn't want to try that. That's too tough a management assignment for me."
On the other hand, Ursprung realized, he had choices that other company heads didn't. Since everyone at Reflexite was more or less in the same boat, everyone might be willing to help out. That realization formed the core of an extraordinary layoff-averting strategy.
* In August the CEO announced a voluntary leave-of-absence plan. With the permission of their supervisors, employees could ask for up to a month (later two months) off, unpaid. Dave Edgar worked things out with the local unemployment office: the company would handle the paperwork, and the volunteers would be eligible for unemployment compensation. Employees on leave would continue to receive full benefits and would maintain their seniority and owner's bonus rights.
* In September and October Ursprung phased in a salary-and-hours reduction plan. For the rest of the year top management would take a 10% pay cut. (When's the last time anyone outside Japan did that?) Middle managers and other salaried people would take cuts of 5% to 7%, and the plant would be closed one weekday a month.
* As part of both programs, Ursprung detailed other ways the company would cut both manufacturing costs and selling, general, and administrative expenses. Cleaning ser-vices would be cut back. A planned facility expansion and four new hires would be postponed. Travel would be restricted.
Needless to say, the reaction to all those moves was mixed. Pat Napolitano, in quality control, remembers her initial reaction as anxiety -- she couldn't remember a time in her 15-year tenure when the company had stumbled. "But then I thought, How like Cecil's philosophy. We're behind last year? Instead of saying that's not much, we'll catch up, we're aggressively doing something."
Napolitano, as it happened, volunteered for two months off, using the time to fix up her house. About 90 other employees chose to take a leave as well. She and others can tell you exactly what the company saved through the program (more than $200,000), and how much the salary cutbacks and other measures would be saving over the seven months (close to $1 million).
By late fall Reflexite managers were detecting signs of a recovery: orders were picking up, and the backlog was once again building. The cuts, however, will stay in effect until March 31, 1992, the end of the company's fiscal year. If business should come back strong, all will enjoy at least a token acknowledgment of their contribution: the formula for calculating the owner's bonus was doubled for the duration. Meanwhile, the company closed the first half of fiscal 1992 with profitability intact.* * *
There are times, it is plain, when Cecil Ursprung feels a twinge of uncertainty about what he has constructed at Reflexite. A decisive, active man -- for relaxation he drives his Porsche 911 in track races -- he confesses to being an instinctive authoritarian. "This employee participation kind of goes against the grain with me. I'm more the kind to tell people how to do things, delegate it all out. I have to work at this stuff." Nor is the company without its problems. Yields still aren't what Ursprung would like them to be, for example, and a quality-assurance program is just getting off the ground. Before long Reflexite will have to spend money on expanding (or moving away from) its bursting New Britain plant. Down the road it will have to set aside funds to buy stock from employees (who must sell it back to the company when they leave).
Even so, consider the prospects. Reflexite's growth isn't limited by the size of its market, Ursprung likes to point out: worldwide demand for retroreflective material runs into the billions, and new applications such as those helicopter-pad pylons are turning up all the time. Nor is the company much constrained by money. Margins are high, and Reflexite has so far financed all its growth with internally generated cash. Even in the current slowdown it has been paying down debt. As for competition, though Ursprung (like everyone else at Reflexite) expresses healthy respect for "the people in St. Paul," he's quick to point out that he hasn't yet lost a customer to them.
"So what's the limiting factor?" asks Ursprung. "The answer, I realized some years ago, is people. We are the limiting factor on this company." And that, of course, is where the structure and culture of ownership pay off most directly. Employee ownership attracts people, like the 1,700 who recently responded to an ad for a sales-and-marketing general manager or the 2,100 who responded when the vice-president of finance job was open. It allows the company to retain people, including those on whom its complex technology depends. Turnover of employees who make it beyond the first year is virtually nil. And the culture of ownership helps people work together in what is frequently a pressure-cooker environment.
Employee ownership has side benefits, too. Even today, years after 3M's offer, Ursprung gets inquiries about Reflexite from would-be buyers -- a couple each month, he estimates, with two or three every year who press their suit avidly. He listens politely, then generally responds in much the same way. "It's interesting you should want to purchase Reflexite," he says, "because the company has already been sold." Sold, they ask -- to whom? "To its employees," he responds. "That pretty much turns them off," he adds with a laugh.
Turns them off. Pity. For the sake of Connecticut -- and for the resurrection of the rest of the American economy -- better it should turn them on.* * *
($ in thousands)
Year ending 3/31/91 4/1/90 4/2/89
Employees 275 225 180
Net sales $31,301 $23,110 $16,595
Pretax income $4,735 $2,672 $2,105
Total assets $18,535 $15,229 $12,613
Net owners' equity $7,246 $5,359 $3,656