Paradise Lost

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A company run by committee may sound like a disaster in the making, but the arrangement actually worked. The group's decisions usually turned out to be good ones, and the cooperation shown by the founders made a strong impression on employees. "It was the consistency of the example they set," says engineer Joe Arnold. "They listened. They cared. And they didn't make promises lightly. We watched them and tried to be the same way with each other and with our customers." Indeed, many employees also did much of their work in committees.

The founders' strong religious beliefs played a role in all this. Although only one of them--Merrick--was a practicing Christian to begin with, the other two had had spiritual awakenings in the early years of the company, and their common commitment to their religion shaped every aspect of their approach to business. Through discussions of their faith, for example, they came to believe that Reell's primary objective should be to make products only of the highest quality. They also established a formal policy placing family responsibilities above business responsibilities. Indeed, staff members were expected to put their families first and arrange their schedules accordingly. And they were admonished to "do what is 'right' even if it does not seem to be profitable, expedient, or conventional," in the words of the company's direction statement.

In 1975, these ideals were put to their first major test. As the economy went into recession, Reell's only customer, 3M, suddenly announced that it had all the wrap spring clutches it would need for the year. Fortunately, the partners soon reached a deal with Xerox (NYSE:XRX), whose orders cushioned the blow. But with sales down 40 percent from the previous year, the company was clearly overstaffed. After the usual lengthy deliberations, the triad decided not to lay anyone off. Instead, they reduced their own salaries 50 percent and asked their 10 employees to take a 10 percent pay cut, later increased to 20 percent. As tough as the cuts were, they allowed Reell to get through the period without losing anyone.

And so it went for the next 30 years. Through good times and bad, Reell's leaders struggled to base their decisions on what was best for the co-workers, as the work force grew from 10 to more than 200. The co-workers, in turn, took responsibility for the company. Production line employees did their own quality inspections and maintained the highest standards. Engineers often made decisions that could later involve tens, if not hundreds, of thousands of dollars.

In one case, for example, an engineer developed qualms about working on a new product that would be used to display cigarettes. He shared his concerns with the salesman for the product, who felt the engineer was overreacting; the project, after all, could have been worth as much as $1 million to Reell. When they couldn't resolve the matter on their own, they brought in other colleagues, who couldn't reach a consensus, either. They next went to one of the CEOs, who said only, "It will be interesting to see how you will work this out." Finally, the engineer and the salesman agreed to let the three leaders of their business group have the final say. After interviewing both people, the managers decided to reject the contract. Although the engineer said he would do his part if the decision went against him, they felt it was wrong to make him work on a project that he had ethical problems with.

Throughout it all, the partners dispensed generous bonuses and gifts when cash flow permitted while paying themselves modestly--no more than seven times what an entry-level full-time employee earned. At one point, they established a "sick bank," into which employees could donate their unused sick days and then make withdrawals as needed. In addition, the founders set up an employee stock ownership plan, or ESOP, that eventually wound up owning 43 percent of Reell's stock.

Reell's employees responded with unflagging loyalty. The company's turnover rate was minuscule--generally less than 5 percent annually, compared with 20 percent to 25 percent a year for manufacturers of similar size.

Given this tradition and the culture it spawned, it wasn't difficult to predict what Reell's leaders would do when confronted with the big decision that arose in the late 1990s. By then, laptop hinges had emerged as one of the company's major products. Reell had done well selling to U.S. companies like Apple and Compaq, but the market was changing. Asian manufacturers were taking over. If the hinge business was to expand, Reell would have to begin selling directly to manufacturers in Japan, South Korea, Taiwan, and eventually China. Meanwhile, sales of Reell's other major product--the clutches used in midpriced copy machines--were softening as the market became increasingly polarized between low- and high-priced machines. It appeared that if Reell didn't go into Asia, the company might eventually be forced to consider what it had never done before--laying off employees.

But the Asia move would bring risks of its own. For one thing, the company would be competing with low-cost suppliers on their home turf. Although Reell's hinges have been superior, it wasn't clear that the difference was enough to overcome the lower prices their competitors were charging. The company would be pressured to reduce its margins, something it had steadfastly refused to do.

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Bo Burlingham

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.

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