Editor's note: This tour of small businesses across the country highlights the imagination, diversity, and resilience of American enterprise.

For a small city surrounded by corn and livestock farms, Fairfield, Iowa, is pretty groovy. It is home to art galleries, ethnic restaurants, green architecture, and the Maharishi University of Management, where twice a day students practice Transcendental Meditation. It is also home to The Sky Factory, a radical experiment in employee empowerment where everyone is treated as an equal.

With his wispy white hair, flannel shirt, and glasses, company's founder Bill Witherspoon looks like Larry David by way of Woodstock. A serial entrepreneur (and former TM teacher), he has started or run ventures including a real-estate company, an adventure travel business, and a genetic testing service for agricultural products.

"I just keep moving from one thing to another," says Witherspoon. "I'm not a businessman. I'm an artist. Artists make the same painting over and over and over again until they finally get it right, which they probably never do. There is no exit strategy for an artist."

In fact, Witherspoon alternates between art and business. For most of his life he's started companies to feed his family, then spent protracted periods painting -- usually in remote areas -- to feed his spirit. The idea for The Sky Factory, which now employs 39 people, was born in 1993 when Witherspoon paid for his kids' braces by replacing the ceiling in an orthodontist's office with a skyscape made from painted tiles. Today, The Sky Factory's products are more sophisticated: backlit skylights and windows that create the illusion of looking out on drifting clouds or rustling foliage. Health care is the company's largest market, followed by corporate, education, hotels, and retail.

Witherspoon launched The Sky Factory in 2002, and from the beginning planned to do things differently. The entrepreneur considered his previous companies failures -- not financially, but culturally. "The people weren't happy," he says. "In the past, I had structured things in a similar way to the wisdom of the business community. This time I tried to throw out the assumptions."

His goal, he says, was to "create the initial conditions under which people will flourish." Those conditions would include things as intangible as respect and as concrete as profit-sharing. Paramount would be the core principles of transparency, flat management, consensus decision-making, service, and performance.

Those are all fine words that -- with the exception of "consensus" -- pop up routinely in mission statements of progressive-leaning companies. But to fully grasp the distinctiveness and ambition of Witherspoon's vision, you have to read The Sky Factory handbook. At roughly 180 pages, it is at once dazzling and a little bewildering in its scope. Witherspoon draws on principles of art, nature, and management to describe his organizational principles and resolve potential conflicts. How do you balance frugality with customer service? How can you be sure of anything if there is no supervision?

The pages are peppered with employee testimonials -- unusual in a handbook. More unusual still, the comments aren't universally glowing. "I believe that most information is AVAILABLE to us, but whether or not it is shared is a different matter," writes one employee about the challenge to attain perfect transparency. The effect is of an organization in conversation with itself about what is right and what is hard and what it can do better.

Rules of the empowerment road.

The kernel of The Sky Factory's operating system is a trifecta of principles taken from the founder's original ambition for the company: transparency, flat management, and consensus. As an example of how the three interrelate, Witherspoon describes the weekly practice of switching facilitator roles within teams. Such rotation furthers flat management because leadership is shared. It requires transparency, because everyone needs the same information in order to take a turn. And it supports consensus, because people with identical information and authority are best positioned to reach agreement.

Of those three principles, transparency has probably been the easiest to implement. Witherspoon comes by transparency naturally; this is a guy who in the company's early days cheerfully told employees his computer password. Today, The Sky Factory practices open-book management on everything except salaries. And those have such a flat structure that few surprises dwell therein.

Flat management has been more challenging. It is a practice that appeals powerfully to some: "We are creating an army of generals," says Aaron Birlson, an employee in sales. But it turns others off. Employees who are personally ambitious have not lasted long at The Sky Factory. "You have to change your mindset that your goal isn't to advance yourself through the company. It's to advance the company. and your situation is advanced with it," says Scott Herman, a production worker.

Employees may not receive exalted titles or higher salaries, but they are very motivated to improve the company's performance. The carrot is The Sky Factory's profit-sharing program. While salaries are relatively low, the company distributes 50 percent of net income each month to its employees, as long as: there were no late shipments the previous month, the bank balance at the end of the previous month is at a certain level, and average operating cash flow of the prior three months is positive.

Sam Estreicher, director of the Center for Labor and Employment Law at New York University, applauds The Sky Factory's experiments. "They want to use the job rotation and the flat-line organization to motivate people to think smart about what they do and come up with innovations and take on more of an ownership perspective," he says. "And they've come up with a compensation model that creates incentives such that the entire workforce wants the company to do well."

For U.S. manufacturing to surge back, "we have to figure out a way for workers to take more responsibility for their jobs," says Estreicher. "I see The Sky Factory as a terrific model."

All of us are smarter than any of us.

Another admirer of The Sky Factory is Jeffrey Hollender. The founder and former CEO of the housewares company Seventh Generation, Hollender is talking to Witherspoon about making The Sky Factory handbook available as a model for members of the American Sustainable Business Council, which he co-founded. "It was really an amazing experience to see many of the things I had thought about coming to fruition," says Hollender of his visit to the company two years ago. "Even some of the things I was afraid to do [at Seventh Generation], I found Bill being incredibly courageous with implementing."

What Hollender found especially "scary" -- from a CEO's perspective -- is The Sky Factory's dedication to consensus. The handbook defines consensus as "a group decision-making process that seeks the consent, not necessarily the agreement, of participants along with the resolution of objections." Witherspoon believes consensus compels participation from the group, requiring everyone to come to terms with how they think and feel about issues. "When you go after consensus, you'll get people who say, 'I don't know. It just doesn't feel right,'" says Witherspoon. "Well, why doesn't it feel right? If you are going to participate in a discussion you've got to have reasons. You keep struggling and you finally get there."

Most of The Sky Factory's employees say the practice makes them feel included and respected, and they appreciate hearing viewpoints they hadn't considered. Birlson recalls one debate during a period of particularly strong sales about whether to raise salaries or the percentage of profit share. "It got heated at times but was never disrespectful," he says. "I remember walking out of one of those meetings and turning to Bob [Walls, at that time the CFO] and saying, 'Where else does this happen? Having an open conversation with the entire company about compensation? And we all come together and make a decision about what to do.'"

The need for leaders.

Of course no one expects The Sky Factory to perfectly embody its founding principles: the demands of business and vagaries of human nature make that impossible. And employees worry about the fate of the experiment when Witherspoon retires. That scenario is already being tested. For the past couple of years Witherspoon has been retreating to the desert to paint for months at a time, leaving in his stead four people without formal authority whom he hoped would exercise a kind of "natural leadership" that would inspire everyone else to step up.

It didn't work. Employees talked about experiencing a lack of urgency, a sense of drift. It became clear that, although Witherspoon never played the CEO card, it was his personality that drove things forward. So last year, Witherspoon named his son Skye, an engineer at the company, as CEO. Bob Walls, the company's CFO, became president.

So far, the chief effect appears to be better follow-through. The company still practices consensus, but on mission-critical issues the new leaders drive it. That is to say they grapple with objections and resolve disputes until a decision to go forward is reached and a plan of execution implemented. In the past, says Skye Witherspoon, "if you didn't have consensus, then a decision did not get made. That was a little frustrating. And I never felt like I had the authority when necessary to give a little bit of a push."

Now armed with that authority, Skye won swift approval for a slate of product introductions, prioritized by the workforce. And after more than a year of failing to act on a new outbound marketing program, the company approved and created one in just over a month.

In a phone conversation from the Oregon desert, Witherspoon -- who is still involved with the artistic side of the business, as well as remaining majority owner and a member of the board -- philosophizes about the change. He sounds mildly melancholy about the deviation from perfect flatness but upbeat about the renewed energy surging through the business. Above all, he says, his own understanding of leadership has changed. "We have many people with leadership qualities, but we discovered you can't just have leadership out there floating in the environment," he says. To get things done in a company without managers, "you need embodied leadership at the top.

"I've refused to let us get out of the category of experiment because I never wanted us to get crystallized," says Witherspoon. "You have to keep asking questions. Is this working? Is this working? If it isn't, then you change. And you hope that change lets the experiment get even bigger."