Last Tuesday the Green Bay-based employees of KI assembled for one of their regular Town Hall meetings. For most of them there was no clue as to what was coming next. There had been some talk that as he approaches his 80th birthday Dick Resch was contemplating retirement, but as he strode to the podium, few knew in advance what he was about to say.
What he had to say was great news for the current and future employees of KI.
Mr. Resch announced that he had arranged to transfer 100% ownership of the company to an Employee Stock Ownership Plan (ESOP). According to the National Center for Employee Ownership, “ESOPs are most commonly used to provide a market for the shares of departing owners of successful, closely held companies, to motivate and reward employees.” And according to Mr. Resch, that is exactly his intent in transforming KI from a closely held private company to a 100% ESOP owned S corporation.
In a videotaped interview with the Green Bay Press Gazette, Mr. Resch said, “[Today’s announcement] spreads the ownership to all employees and it also insures that KI will continue to be in Green Bay. The employees, for generations now, have helped me build the company. It’s been a great company to work for, and I think we’ve been able to do quite a few things in the community that outside ownership would not be interested in. [We had] lots of options for an equity buyer or a competitor. A competitor, I think, would probably reduce the size…maybe transfer assets to some of their other plants. But my prime goal is to keep the employees working for KI as an independent company. And they all have skin in the game now, which is great.”
The reaction of those in the audience grew from big smiles and handshakes to a rolling standing ovation as the news began to sink in. And as Mr. Resch departed the podium he was greeted with hugs and warm gratitude.
An ESOP is a trust fund that owns the company. At KI all U.S. based full-time employees earn shares in the ESOP as a pre-tax part of their compensation. New employees are fully vested in the plan after six years.
The tax benefits to employees can be significant, since no tax is paid when the compensation is earned – usually in their higher tax bracket years. The caveat, of course, is that if one withdraws money before the normal retirement age the tax is due in that year – along with a hefty early withdrawal penalty.
According to KI Chief Financial Officer Kelly Andersen, the ESOP was established several years ago as the funding mechanism for KI’s retirement plan, so it already owned 29% of the company. For this transaction it borrowed the money from a consortium of five banks to buy the remaining 71% of the shares. Over time the company will repay the debt from ongoing earnings.
All voting rights related to the shares are retained by the ESOP and held in Trust by an independent Trustee who leaves the running of the company to its board of directors and company management. And according to the National Center for Employee Ownership, employee owned companies typically outperform non-employee owned companies on a range of parameters. (See Employee Ownership: Building a Better American Economy, on the NCEO website.)
Dick Resch is a fierce competitor who rowed with the MIT crew in college, and with his 80thbirthday on the horizon still rides his bicycle multiple times a week – not as competitively anymore he tells me, but knowing him I imagine his riding is still faster than most. While he has not yet announced when he plans to retire, now would seem to be just about the right time. KI is coming off a year of double-digit growth in revenue, he has put a terrific management team in place and business is very strong in the educational sector, the heart of KI’s business.
Fierce ompetitors want very badly to go out while on top, and with the ESOP now in place and the company hitting on all cylinders I expect the next big announcement from Mr. Resch will be that he’s going to leave the company to its employees and go about his philanthropic ways.
