How Organization Design Drives Value

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How Organization Design Drives Value
January 11, 2019 at 12:00 AM
by Marjorie Kelly

In the minds of many entrepreneurs, taking a company public, with shares trading on a public stock exchange, represents the pinnacle of success–a dream come true. For EA Engineering founder Loren Jensen, that dream proved a nightmare.

Located in Hunt Valley, Maryland, EA Engineering, Science and Technology is an environmental consulting firm with 500 employees and $140 million in annual revenue. For more than a decade, the firm traded on NASDAQ, but after initial success the company cycled through three presidents, saw morale plummet, and found itself in trouble with the Securities and Exchange Commission over accounting misstatements. Pressure for aggressive growth had clashed with the company’s scientific culture, damaging its environmental mission.

Jensen led a move to buy the company back in 2001. He then worked with new president Ian MacFarlane to transition to 100 percent employee ownership through an Employee Stock Ownership Plan (ESOP). MacFarlane also organized the firm as a benefit corporation, embedding in its DNA a commitment to the environment and community.

The company has prospered ever since. Its design keeps its environmental mission in the hands of genuine stewards, employees, rather than in the hands of absentee owners removed from the organization’s life. “Now we focus on who we are and what we’re doing. We returned immediately to the task of understanding environmental problems and knowing what to do about them,” Jensen said. “Nobody buys stock except in the hope of a good return on investment. The problem this poses for a company like EA is you confuse the goals. It was very difficult to manage in that environment.”

EA Engineering is one of multiple companies examined by my organization, the Democracy Collaborative, in research aimed at answering questions critical to 21st century enterprise design and the future of our planet: Are mission-controlled, employee-owned companies better environmental stewards than conventional finance-controlled corporations? Could these be the harbingers of next generation enterprise design?

If our goal is to design an economy that lives within planetary boundaries, we need to better understand the relationship between enterprise design and sustainability outcomes. Environmental advocates generally make the “business case” for sustainability, but research by the Massachusetts Institute of Technology found that such steps resulted in commercial benefits for only 37% of firms.

As U.K. sustainability consultant Carina Millstone observes in Frugal Value, true sustainability cannot be driven purely by commercial concerns. It requires moral decision-making. What enterprise designs enable and encourage moral decision-making?

Our research findings, though still preliminary, point to an emerging model, viable in today’s economy: the employee-owned B Corporation or benefit corporation. Weaving together worker ownership with mission-driven governance, this model embodies design elements required for true environmental sustainability.

In this model, mission is embedded through  the B Corporation  nonprofit  certification process, or  the benefit incorporation  framework  in  state  law. Among B Corporations, we have identified 35 employee-owned firms, including Eileen Fisher, King Arthur Flour, New Belgium Brewing, Namaste Solar, and Gardener’s Supply.  In these companies, founders avoided sale to financial owners, instead passing ownership to employees as stewards, embedding a commitment to social and ecological benefit in governing documents. The companies show an alternative exit for founders, rather than going public and facing the multiple pressures that make it more difficult to have a deep sustainability mission.

Shareholders in publicly traded companies are large in number, geographically remote, disengaged from companies, and structurally unable to effectively voice social and ecological responsibility. Creating shareholders with different characteristics–fewer in number, close to the firm, engaged, committed to a common social or environmental mission–could help create companies compatible with an environmentally sustainable economy. In this configuration, owners can become moral agents.

Eileen Fisher Inc. is a good example. A $440 million company that designs and markets women’s clothing, it is 40% employee owned, a B Corp, and a leader in human rights and sustainability. Founder Eileen Fisher’s vision is of a world where business is a force for good. As the company website says, “Our vision is for an industry where human rights and sustainability are not the effect of a particular initiative, but the cause of a business well run. Where social and environmental injustices are not unfortunate outcomes, but reasons to do things differently.”
Fisher at one time thought about selling to another company. When Fisher met the CEO of Liz Claiborne and asked why she wanted to buy the company, that CEO said, “We can’t meet our mandated target of 10 percent annual growth without buying other companies.” As Fisher said, “I realized that most people were interested in what they could get out of the company, not what they could give to it.”

Instead, Fisher decided on an ESOP, in which shares are held in trust for employees until they retire or leave. The average equity share of employee-owners in an ESOP is $134,000, according to Rutgers University employee-ownership expert Joseph Blasi; this is almost 10 times the average retirement account for American households headed by someone between the ages of 55 and 64 ($14,500). The ESOP ensures that, when Fisher retires, the company will be owned by “the people who put their blood sweat and tears into it; the people who love it and care about it and think about it every day,” as Fisher said. That’s very different from owners who see the company as a way to extract maximum short-term profits.

Employee-owned benefit corporations–like Eileen Fisher and EA Engineering–embody a powerful model of enterprise design for a new era of ecological sustainability and social equity, a corporate design for the 21st century and beyond.