At the start of each semester at the Wharton School, Eric van Merkensteijn would stand before a classroom of M.B.A. students and try to stanch their creeping cynicism with the fervid recitation of his own human-resources philosophy. People are basically trustworthy, honest, and loyal, the associate dean would proclaim, and employers should treat them that way. It was an idealistic assertion, he knew. Still, nothing in his nearly 30-year career at the University of Pennsylvania had convinced him that it was a naïve one.

In 1993 van Merkensteijn retired from the groves of academe and six years later -- in his first-ever act of civilian entrepreneurship -- he opened the eponymous van M's Music Bar & Grille in Philadelphia. Eager to practice what he had so long preached, the novice restaurateur and club owner hired a crew of what he took to be trustworthy, honest, and loyal employees. Then van Merkensteijn discovered that some of those hires were fleecing the business -- through a combination of pilferage and outright theft that added up to tens of thousands of dollars. He felt like a man who had just enjoyed a sumptuous meal, only to be presented with a five-figure reality check. "My basic stance has shifted from assuming all to be honest to assuming all to be dishonest until they prove otherwise," he says. "All you need is to be burned a few times, and you feel much more pessimistic."

Funny thing, though, van Merkensteijn doesn't sound pessimistic. Despite those early travails, he has not abandoned his greater goal: to reform through shining example an industry wormholed with dishonesty and distrust. "One reason I'm doing this is I want to make a difference. I don't want just a good restaurant. I want to have impact," he says, sitting in the dining room of his club, which was formerly the Middle East Restaurant, a 42-year-old nightspot notorious for its belly dancers and for its co-owner, Jimmy Tayoun, a powerful local politician and author. (Tayoun's book, Going to Prison?, a practical guide for new inmates, sprang from his 1991 conviction for bribe taking.) Van Merkensteijn hopes to transform this infamous site into a simply famous one. Changes are already afoot: the stainless-steel-topped tables and aqueous blue backlit bar are his innovations. And so, too, are a series of business practices that bring the clarity of B-school case studies to the borderline bedlam that characterizes the restaurant industry.

Whether van Merkensteijn's experiment will ultimately be deemed "inspirational/effective" or "inspirational/quixotic" is anyone's guess. First the restaurant itself must succeed: its owner projected that it would be profitable in its first year of operation, with sales of $750,000. But the business has taken some substantial hits -- not only from employee waste and theft but also from a millennial New Year's Eve celebration that was more whimper than bang and from the Republican National Convention, which blew in and out of town, leaving van Merkensteijn with thousands of dollars' worth of uneaten food and a handful of souvenir pens. The crowds, too, have been slower to materialize than expected, deterred, perhaps, by van M's novel but oxymoronic market niche as possibly the only smoke-free bar and music venue on the East Coast. In addition, employee turnover in the first 10 months was more than 100%, although the current crew, van Merkensteijn believes, will stick around long enough to grow some moss.

"I think there's a market problem. It's taken him longer to build the customer base than he thought," says Tom Martin, president of ReThink Inc., a consultancy for restaurants and other companies, who has advised van Merkensteijn. "Eric may have to change his business model. But he'll never change his ideals."

A native of the Netherlands, van Merkensteijn, 54, entered the University of Pennsylvania in 1964. Shortly before he graduated, the school hired him to run its language lab and audiovisual center. His aggressive fund-raising for those departments brought him to the attention of Wharton's dean, who invited him to join the business school's administrative staff. After earning an M.B.A. in 1971 and an M.S. in education in 1973, van Merkensteijn parlayed his good grades and relationships with faculty members into teaching assignments. "If you look at the academic ranks in Wharton, 98% of them have Ph.D.'s," says the doctorate-free van Merkensteijn. "This was the back door to an academic career."

In 1993, after having served as both an adjunct full professor and an associate dean, van Merkensteijn finally climbed down from the ivory tower and found himself standing on a plain of possibilities. His bank account was healthy. His children were grown. And his wife urged him to get out there and chase some dreams.

So van Merkensteijn bought a Harley. He did some consulting work. And he set about raising the money for what is viewed as one of the most rose-tinted ventures in the entrepreneurial spectrum -- a restaurant.

An emotional advocate of family businesses, van Merkensteijn began with a mass E-mail campaign offering all his relatives the opportunity to invest in his eatery, raising $600,000 in the process. Using a $300,000 line of credit from his bank and his own savings, he tossed another $1 million into the pot. Then he shook the family tree once more, this time bringing down a shower of ideas. His relations invented everything from the restaurant's name, logo, and color scheme to individual menu items (notably the "grisstini" -- a martini flavored with smoked snails).

The business practices van Merkensteijn established, however, were his own, the product of a lifetime's study of management, ethics, and organizational dynamics, coupled with an ingrained sense of what is right. "There are a lot of ethical questions surrounding the behavior of the CEO as the leader of an organization," says van Merkensteijn. "Many would judge someone like [former Scott Paper and Sunbeam CEO] Al Dunlap as the exception in business. But in the restaurant business Dunlap is the rule -- the best interests of the owners and shareholders far outweigh the interests of employees and their families." Van Merkensteijn planned to upend those expectations by, among other things, offering equity to all employees, right down to the dishwasher, providing staff members with entrepreneurial opportunities within the business, and instructing everyone from prep chefs to busboys in marketing strategies and concepts like return on investment. And in an industry where bigotry is an ugly truth, van Merkensteijn has reacted ferociously, establishing a zero-tolerance antidiscrimination policy that last year contributed to the firing of eight employees who used racial slurs.

One would expect the prospect of so enlightened a workplace to exert a moth-to-the-flame attraction. And indeed, van Merkensteijn was elated by the quality of the job candidates who flocked to van M's as he prepared for the grand opening in October 1999. The waiters, bartenders, and even the busboys who slid their résumés across his desk boasted years of industry experience from which van Merkensteijn hoped to learn. But experience, in this case, manifested itself chiefly as the opposite of innocence. "What I found is there's a group of people that work only at new restaurants because they know they're not in good shape and the owners aren't ready," says van Merkensteijn. "So they take advantage of the ignorance and confusion."

Despite his years of preaching the essential honorability of man, van Merkensteijn never expected that all his employees would be paragons. What surprised him "was the intensity and the extremeness" of their dishonesty, he says. "I knew that a bartender was capable of stealing from me. But I had a bartender who in three days stole $600 cash." Like a modern-day Damon Runyan, van Merkensteijn enumerates the petty swindles perpetrated against him by a gallery of rogues in white aprons. There were bartender tricks, such as ringing up regular drinks while charging for premium cocktails and pocketing the difference or, conversely, charging $1 for a $4 purchase and reaping the customers' gratitude in hefty tips. There were waiter tricks, some egregious, like altering tip amounts on credit cards; others subtle, like aggressively pushing ever-moreexpensive bottles of wine and consequently ensuring large gratuities at the expense of customer satisfaction. And then there were the tricks employed by busboys, cooks, and dishwashers, such as stealing produce and hiding steaks in the bottom of outgoing trash cans, to be collected after the restaurant had closed. "It was absolutely eye-opening for me and very, very costly," says van Merkensteijn of those first few months. "Now I'm much more sophisticated, and I've learned how to spot these people. They're the ones who are much smarter than I am."

All wised up, van Merkensteijn began putting in controls -- such as a new electronic cash-register system -- to end the fraud. Not surprisingly, many of his seasoned professionals either got the boot or moved on to less vigilant pastures. Van Merkensteijn's policies -- including the offer of equity, which kicks in after three months' employment -- were simply not enough to change those workers' attitudes or entice them to trade immediate gains of the ill-gotten variety for the chance of a solid future.

A survivor from van Merkensteijn's first hires was a dishwasher with scant restaurant experience but outstanding moral credentials: van Merkensteijn had met him in church, where both men's wives sang in the choir. But if that dishwasher was an exception, van Merkensteijn hopes he will ultimately prove the rule. Fred Stevens, who was 54 and unemployed when he was hired, is flourishing under van Merkensteijn's enlightened regime. Stevens has embraced the concept of employee ownership, using all his overtime pay -- $3,000 in 10 months -- to buy additional shares in the business. "I've never had equity before, and it makes a difference," he says. "It makes you want to make things look and work better."

Rewarding even the least-skilled workers pays off, van Merkensteijn believes, because their contributions, while subtle, can make the difference between a place you eat and a place you come back to eat. "Fred Stevens cares whether there's a chip on the edge of a glass," the restaurant owner says. "He's got a little brush, and he hand-scrubs each piece before it goes into the dishwasher. He's even set up a whole rinsing-soaking process because he feels the dishwasher doesn't do the job adequately."

Meanwhile, the entrepreneurial opportunities at van M's help van Merkensteijn hold on to bartenders, a notoriously peripatetic species. For a while the restaurant closed at 10 p.m. on Sundays -- opera night -- just an hour after the last fat lady sang. But now van Merkensteijn turns the waning weekend hours between 10 p.m. and 2 a.m. over to Tom Lambiase, a 23-year-old bartender. Lambiase arranges for entertainment, plans the drink specials, and markets the events: creating paper flyers and mass E-mailing the van M's customer database. For his troubles, the bartender gets his normal $3 an hour plus tips -- plus 10% of the cover charge. "The first Sunday, it was like $200 in receipts," says van Merkensteijn. "Now he's got it up to $1,500. What's his motivation? Sure, he wants to make money. But he also wants to own his own restaurant someday. And what I've given him is a four-hour block in which this is his restaurant."

Not all the workers at van M's are equally receptive to their employer's management style, however. "I understand what he's trying to do. And some of it does work," says Ronald Johnson, executive chef at van M's. "But it's hard for someone to come into this business and try to reverse the wheels, because those wheels have been turning in one direction for years." Johnson worries that "once you treat people like owners instead of employees, they start getting into things that they shouldn't be getting into." Nor is he keen on van Merkensteijn's efforts to tear down the Jericho walls that separate kitchen staff and wait staff in most establishments. "The way it is here, the kitchen is too far into the floor's business, and the floor is too far into the kitchen's business," says Johnson.

Johnson's skepticism is understandable. Before joining van M's he spent 20 years in more than a dozen restaurants watching things not change. Van Merkensteijn hails from a more cloistered background, but he has the sweeping perspective of someone who has delved into the lives of hundreds of companies. "In the corporate world there's a healthier, longer-term, more appropriate relationship between people and companies, and I believe that it can exist in this world as well," he says. "Of course, there's the irony that the lack of loyalty and the greediness you see in this industry are becoming more evident in the corporate world. But that's a problem for another day."

The problem for today is making van M's fly so that its owner's high-minded experiments produce concrete rewards for employees who are driven more by self-interest than idealism. And in that regard the former professor's confidence is as contagious as his enthusiasm. "I know that a lot of start-up businesses, especially restaurants, can be a little shaky," says Stevens. "But I think we can make a go of it. I certainly hope so. I'd like to make it until I can retire in another 10 years."

Leigh Buchanan is a senior editor at Inc.


THE START-UP ISSUE

Part 1: Your Way

The Rationalist: The Death of Gut Instinct
The Copycat: The Next Starbucks
The Spin-Off: Hiding in Plain Sight
The Soloist: Balancing Act
The Idealist: Into the Frying Pan
The Zealot: Mission Critical
The Pro: The Rules
The Accidental Entrepreneur: Field of Dreams

Part 2: Anatomy Update -- Big Plans

Part 3: The Start-Up Diaries -- Year One


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