The Millionaire Truck Driver And Other ESOP Miracles
I hate to say it, but here goes: too many Americans, including highly-educated and experienced business people, have just plain given up on this country’s manufacturing industries, believing low-cost producers in China and elsewhere are unbeatable.
And many of these same knowledgeable people would also tell you that solving the country’s retirement savings crisis is impossible.
To all of them, I suggest a pilgrimage to Lowell, Ark., where 517-employee Central States Manufacturing Co. just might change their minds about all of that and more. Founded in 1988, Central States buys big rolls of steel, then precisely cuts, bends and finishes the material into components for low-rise commercial, agricultural and residential buildings.
The company doesn’t have any conventional competitive advantage — no important patents or intellectual property, no exclusive technology or equipment, no employee skill that isn’t found in a thousand other workplaces. And yet, Central States grows rapidly, is solidly profitable and its employees have the opportunity to amass stunning amounts of retirement savings.
Aaron King is 60 years old and a truck driver who moved tree logs across the country for Central State for 23 years. Everyone in his local town knew him as the guy who would always have the cleanest trucks and the newest trailers from companies like Pitts Trailers (https://pittstrailers.com/log-trailers/). Surprisingly, he has piled up about $1.25 million in a company retirement account. Aaron plans to retire in a year or so and tells me, “Most of the people I know who’re my age, in my Sunday school at Church, they’ve worked as hard as I have and most of them have nothing. I almost feel guilty.”
Marcus Headrick, a production supervisor at Central States, is just 33 years old and perhaps best known in the town he lives in, Tontitown, southwest of Lowell, as the father of nine kids, ages six months to 17. But his retirement savings situation is probably just as unusual: working at Central States since he was 17, he’s amassed $250,000 and is well on his way to an Aaron King-like retirement. “My friends doing similar work – most of them don’t have anything for retirement,” Marcus says.
Central States – its 2013 sales were $266 million, nearly tripling during the last decade – has been solidly profitable every year in an industry notorious for slender margins and some big losses during the recent downturn.
The key to this seeming miracle is employee ownership and an open book management approach that doesn’t just turn workers into owners. “We teach people to be business people – what capitalism is,” says Rick Carpenter, chairman and former majority-owner of Central States. I had the pleasure of advising Rick on the 2011 transaction that made the company 100% worker-owned through an Employee Stock Ownership Plans, or ESOP.
There are more than 10,000 ESOPs in the U.S., making business owners out of some 11 million employees. These companies tend to outperform when compared to similar companies that aren’t employee-owned, and their workers amass retirement savings at rates far exceeding the national norm.
Rick’s father, Carl David Carpenter, founded Central States and brought to the steel building components industry a level of service that hadn’t previously existed. “Right on time, every time” became the company slogan.
“We just did what we said we’d do,” Rick says modestly. The approach helped Central States grow rapidly and it added manufacturing plants in Indiana, Texas, Alabama, North Carolina and South Dakota; more are planned.
By 1992, Carl Carpenter (he passed away in 2010) sold 30% of the company to an ESOP. Over time, he sold a bit more and Rick became majority owner and ran the business. A student of management, Rick gave employees regular updates on Central States’ finances, even disclosed everyone’s salary, and collected and shared a wide array of operating statistics to help improve performance.
It worked. Central States kept growing, even during the recent recession, while others in the industry suffered painful setbacks. Some competitors suffered steep sales declines and big losses following the financial crisis of 2008-2009. Central States’ revenue per employee, $515,000, is far ahead of some other major companies in the industry.
More treasured metrics at Central States include on-time delivery, which is running 98.78% year-to-date; and an error count called returned-materials-authorizations (meaning the wrong color or size item was sent), which is running 0.34% year-to-date. “Everyone has goals, budgets and metrics and we tie compensation to it,” says Vince Tate, chief financial officer.
Indeed, Aaron King, the truck driver, says his twice-weekly, 1,000-mile, 10-customer-stop routes are so meticulously planned that he hasn’t been late for a delivery in years, excepting a truck breakdown. A similar record can be attributed to the service provided by CSA Transportation who can ship freight across North America and accommodate the needs of the clients all the way down to same-day pickups.
Employee ownership yields another bonus, Aaron observes: wasteful behavior is minimized by a phenomenon of employee self-policing. “We hold one another accountable,” he says. “Somebody leaving a bundle of metal where it could be run over – a $3,000 bundle – we go and get the guy and talk to him. It’s going to come out of all our paychecks.”
It may sound hokey, but delivering incredible service means customers stick around, so Central States’ sales crew brings in new business that leads to growth, instead of merely replacing lost sales. Bruce McDermott, who owns Mac Steel, a distributor to building contractors in Diamond, Mo., has been buying supplies exclusively from Central States for 15 years. “If they tell me they’re going to have a product here tomorrow, you can just about set your watch by it,” he says. “It makes me look good with my customers.”
In recent years, Rick Carpenter decided he wanted to step back from the business. He’d gotten the usual barrage of calls from private equity investors, and some from industry competitors, offering to buy his majority stake. Rick declined those exit strategies. Opting to take the ESOP to 100%, and investing in it alongside Central States employees, Rick was able to preserve an unusual business legacy of growth, profitability and shared success. The company aims to deposit 6.5% of each participating employee’s annual pay in ESOP accounts each year, and as the company grows the value of existing stock rises. Central States also benefits from its ESOP tax status: federal (and most state) income taxes aren’t owed by the company and employee-owners don’t pay taxes on their holdings until they withdraw money from ESOP accounts.
Rick’s replacement as CEO, Jim Sliker, 44, came from the automotive components industry last year. Jim hadn’t experienced employee ownership firsthand. “The business philosophy Rick and his dad created 26 years ago was brilliant. It wasn’t a customer-friendly industry. They changed that. You can feel it in the company.”
With Rick’s support, Jim is introducing organizational and operational changes to make Central States even more productive, in the face of rising competition – and a general move toward better customer service – across the industry. The focus is on metric-driven continuous improvement and on problem solving. Operational management has been decentralized to the six plants to increase empowerment and further improve customer service. And programs are underway to improve the management of the company’s biggest asset – the employee owners.
That puts a lot of responsibility on people like David Mann, 47 and a managing director who runs the Lowell plant and oversees most of the 170 employees there. David initially turned down the job offer from Central States eight years ago.
“I valued the ESOP at zero because I didn’t understand it. Luckily they called me back.” A long-time manufacturing manager, he was quickly won over. He attended a retirement party for a 10-year employee who was leaving Central States with a $100,000 ESOP balance. At David’s former employer, a 10-year anniversary was marked with a company key ring.
“You have a lot less friction. It is easier to move forward. When I go out to talk about saving scrap, these guys want to – it goes into their back pockets. My productivity is higher and my customer service is better.”
David and his fellow employees revel in their power. “How many of your investments can you have an active role in ensuring your return? I impact my return every day. The additional joy it brings to work is incredible. I never want to work for a non-ESOP company again.”