Does an Employee Stock Ownership Plan transform any company’s culture by turning workers into owners, or must an employee-focused culture come first, subsequently made more productive and rewarding by a switch in ownership format to an ESOP?

Given that my firm’s business is helping to structure ESOPs, I would love to be able to tell you that merely adopting an ESOP is like magic, turning formerly top-down, non-transparent and mediocre-performing companies into high-functioning, collaborative workplaces. But my experience doesn’t support that, and the happy case of SmithBucklin, the dominant player in the association management industry, underscores the argument that an ESOP is but part of a successful employee-owned company.

After decades of top-down – if benevolent – leadership put in place by founder William E. Smith, SmithBucklin was sold in 1998 to private equity owners and again in 2002 to another private equity group.

What made the second deal different is that it brought back to SmithBucklin Henry Givray, who had risen in the company’s management ranks from 1983 to 1996 and then departed to test his entrepreneurial chops, serving as CEO of an online services company for retrieving court records and electronically filing legal documents to and from our nation’s courts. In 2001, he led the sale of that company to the information firm LexisNexis. And then in 2002, Givray teamed up with new private equity owners to buy SmithBucklin. As CEO, he began establishing a new culture that not only guides and inspires but also invests trust and accountability in employees to drive performance by providing extraordinary service and creating value for client organizations.

It wasn’t that SmithBucklin was a laggard. Even then it dominated the association management business and attracted talented professionals from many fields. But Givray knew it could do better. “The difference between having a good year now and then and building a great, enduring company, is a well-articulated, authentic culture,” Givray says. He’d experienced SmithBucklin’s former culture of tight top-down management control, lack of transparency and conflict avoidance and was determined to change all that.

“Henry brought back the people aspect,” says Cindy Stark, who joined SmithBucklin right out of high school 36 years ago and is now a director in the firm’s event services department. She sums up the renewed culture thusly: “You take care of the people, they’ll take care of the business.”

The second deal occurred shortly after the dot-com crash and resulting recession, and SmithBucklin had to contend with painful cutbacks at some of its client associations. “It was a turnaround,” Givray recalls. But three years on, he was persuaded that both the SmithBucklin culture and its operations were ready for another big change, and proposed buying out the private equity owners through an ESOP.

“For me, I had always had in my mind that this company should be owned by employees,” Givray says.

What followed was an unusual and challenging transaction, one my firm was privileged to watch unfold, in which SmithBucklin employees were offered the opportunity to invest some or all of their existing retirement savings. Most ESOPs don’t require employee buy-in. Employees simply receive the stock benefit as part of their overall compensation.

SmithBucklin’s ESOP was also unique in another regard. Experts had informed the company that ESOPs of this type typically take 12 to 18 months to create. However, the private equity investors wanted it done in 90 days – a goal that was achieved.

Some 67% of SmithBucklin’s 488 employees eligible at the time invested. Of that group, 40% chipped in 100% of their 401(k) accounts. A large sum was borrowed, made easier by favorable ESOP tax provisions, and a small amount of outside investment finished the financing.

“It was unbelievable,” Givray says. “The transfer of ownership from outsiders to employees was the proudest moment of my career.” The regulatory hurdles in the deal were substantial, given, in Givray’s words, that SmithBucklin was “selling securities to what the SEC considers ‘unsophisticated investors’.” Informational sessions were held and employees were invited to bring along financial advisors.

Cindy Stark, the 36-year employee, brought her brother, who worked in auditing at a Big-Four accounting firm, and he had prepared a detailed list of questions. In the end, the presentation answered them all and he didn’t have to ask any, Stark recalls. She invested half of her 401(k) and since the transaction has invested 100% of her retirement contribution each year in the ESOP, upgrading her retirement savings status from good to great.

Stark, 54, confides that, while she has no plans to retire, financially she could do so at 60. “And if something tragic happened now, I’d be fine. I feel I’m doing much better than my friends.” Over the nine-year period since it was established, an investment in the SmithBucklin ESOP has significantly outperformed the S&P Index.

For her, the ESOP provides a direct link between her performance at work and her personal financial strength. “In the old-old days, ‘We had a great year – and here’s your raise.’ ” Now, Stark says, “You can directly share in the success of the company.”

Givray concurs: “It’s our talented, hard-working and dedicated employees who create value and ensure long-term vitality and success of client organizations that in turn drives company performance and growth. They, not outsiders, should have the opportunity to reap the rewards and experience the fulfillment of ownership.”

Today, the company has more than 650 employees and annual revenue of $100 million. SmithBucklin manages about 100 major associations and provides more limited outsourcing services to another 300 or so organizations. Paul Vella, a past president of a SmithBucklin client, the North American Building Material Distribution Association, explains the reliance on the firm: “We have a new president every year. The board turns over every three years. Our executive director (SmithBucklin’s Kevin Gammonley, running the association for more than a decade) is the one managing for the long term. He understands what’s going on with our industry.” Entrusting the association to a firm known for employee continuity adds comfort, Vella says.

It’s hard to measure an ESOP’s impact on productivity, innovation, retention of key employees and the like, but SmithBucklin’s employees individually demonstrate the impact. Michael Silverman, senior vice president and chief legal officer, left a law practice, which ultimately would have paid him more, to come to SmithBucklin in 2000. Of the ESOP retirement savings boost, he says, “This has been a nice offset. People started recognizing a greater value the company can provide them in terms of wealth creation (when asking), ‘Is this the place I’m going to spend my career?’ ”

Victor Bohnert, a vice president in SmithBucklin’s technology practice, left the fast-paced world of political consulting in Washington in 2000 to follow his wife and her new job to Chicago. Joining SmithBucklin, “Initially, I’m not sure I saw it as a long-term stop for me.”

Then, Givray showed up and changed the culture, Bohnert says, which improved morale. And then came the ESOP, improving the overall compensation potential. “It put morale on the fast track,” Bohnert says. “It definitely accelerated the pace of change. There’s an actual attachment of corporate success and individual success.”

I’ve spent my career helping companies adopt employee ownership, as opposed to other exit strategies, and I can point to numerous studies showing that ESOPs outperform similar companies with different ownership structures. But the truth is, speaking generally about ESOPs vs. other forms of ownership, the ESOP companies have an unfair advantage: management that is already enlightened about the power of an engaged workforce.