KKR Forging a New Path For Capitalism?

Back in January, Lydia DePellis of the New York Times wrote an article on how private equity is starting to share profits with workers, without taking a financial hit:

Last night, CBS 60 Minutes reported on how KKR is championing employee ownership:

Fifty years ago, CEOs earned around 20 times the median worker salary. Today's CEO can make in a day what the average laborer earns in a year. No wonder there's not so much a wealth gap, as a wealth canyon, rendering the American dream—for so many—a mirage… Into this crisis strides Pete Stavros, unlikely champion for empowering—and enriching—the rank-and-file. Stavros is a heavyweight in the world of private equity… an industry famous for its ruthlessness; yet he's emerged as the leading evangelist for the concept of employee ownership. His idea: take the same incentives that have long helped the C-suite get rich, and apply them to the folks working factories, flatbeds and farms.

Norman Rockwell never did paint Arthur, illinois. but what a canvas of Americana… beating slow in the heart of the heartland, this town of 2,200, sits in a pocket of Amish country… a place where past and present cohabitate… 

Not long ago, Arthur was the unlikely site of a daring experiment in American capitalism. C.H.I. Overhead Doors, which manufactures garage doors, was founded by a local Amish carpenter. Then in 2015, KKR—one of the world's biggest private equity firms, came to this small town and purchased C.H.I. for $700 million. That's when Brad Edwards, a 19-year veteran of the factory floor, and his wife Crystal, started Googling the new corporate overlords.

Jon Wertheim: What'd you learn?

Brad Edwards: To me it seemed like they owned half the world, right, (laugh) you know? And then the rumors start goin' around, like, "Oh this is-- this is big New York private equity. They're gonna skin this down to the bare bones until they can squeeze a few bucks off of us. And whenever they leave, there's gonna be nothing left." 

Today, roughly 12 million Americans are employed by companies owned by private equity, firms like KKR that specialize in buying businesses with the goal of improving performance and value, and ultimately reselling for a profit: a practice that often involves cuts and layoffs. Over a 10-year span, it's estimated that at least a half million jobs have been lost to private equity cutbacks…

That would have devastated Brad and Crystal Edwards. Buried under credit card debt and with no savings, they had taken second jobs to support themselves and their three daughters.

Brad Edwards: You were workin'-- she worked midnights at Casey's, the gas station used to be open 24 hours, so.

Jon Wertheim: You took a late shift at the gas station? 

Crystal Edwards: Late shift at a gas station, and then maybe slept, or maybe didn't sleep.

Soon after KKR bought C.H.I., employees gathered to meet the new boss, KKR executive Pete Stavros… who came bearing an unexpected message: no slashing, no burning, C.H.I. would be growing. And the entire workforce would now be part-owners in the company. 

Jon Wertheim: What's your immediate response when you heard about that?

Brad Edwards: It w-- it was-- too good to be true, right? Like, you would hear people talk about, "No, this is just-- they're just dangling the carrot," right? 

Jon Wertheim: What's the catch?

Brad Edwards: Yeah.

Crystal Edwards: Yup. Yup. What's the catch? Exactly.

Pete Stavros: A lot of times, you're walking in and people say, "Pfft. I've heard promises before." 

Stavros had given the employee ownership pitch before and was accustomed to a skeptical audience… 

Pete Stavros: Day one, we sit down with the workforce. We explain at a very high level, "This is our business plan. This is where we're headed. These are the key priorities. There is a pool of ownership set aside for you." 

His idea, really, is simple: give rank-and-file workers a stake in their company on top of salary—plus a voice in how the business is run day-to-day. With skin in the game, they'll be motivated to work harder and smarter.

Pete Stavros: Ownership is really an ethos, it's a mindset. What I mean by that is what you want are people feeling like, "These are my products. So if I'm sending out poor quality, that's a problem for me. If our productivity's down or if our customers are unhappy, these are my customers." And this doesn't happen overnight. But when they pay off, you do get behavior change. You get people on the shop floor, saying, "I have ideas on how to reduce scrap or improve quality." 

The concept is not a new one. In the 70s, Congress passed laws to encourage employee ownership, a story 60 Minutes covered at the time… 

But as corporate America struggled with the complexity of a new model, the effort sputtered. Today, while it's common for executives to be compensated with shares, fewer than a quarter of private sector employees own a stake in their company… all as their wages and wealth have stagnated. On this topic, devout capitalist Pete Stavros can sound downright revolutionary.

Jon Wertheim: You've said the social contract in America is broken right now. What do you mean by that?

Pete Stavros: That workers feel like they don't have hope. They don't have a way to get ahead. There's half of America earns an hourly wage. Most of them have no assets, no plans for a dignified retirement.

This, Stavros says, is not just bad for society; it's bad for balance sheets.

Pete Stavros: 70% of America doesn't like their jobs. Somewhere around 20% hate their jobs. They're throwing the proverbial wrenches in the machinery.

Jon Wertheim: Like, sabotage?

Pete Stavros: Sabotaging their own employer. That's bad for human beings. It's bad for our economy. 

Jon Wertheim: You were very clear though, this is not charity. This isn't philanthropy. This is-- isn't socialism. You are making a business case.

Pete Stavros: This is the right thing to do that also happens to be good business.

His obsession with employee ownership traces to his working-class upbringing outside Chicago. His father paved roads for a construction company.

Pete Stavros: And the lessons around the dinner table for my sister and I were really about the plight of the hourly worker. There's no incentive. I mean, the thing that really drove my dad crazy, he used to talk about the need to just "work steady." If you work too fast and you're too productive, your hours go down and your paycheck goes down. And if you–

Jon Wertheim: You need hours.

Pete Stavros: You need hours.

In business school at Harvard, Stavros published research on… you guessed it, employee ownership. Once he'd reached the gleaming offices of KKR, he put the program into action, for the first time in 2011. 

Today, thanks to Pete Stavros, KKR has implemented the model at 47 companies and counting… that's 100,000 employees globally—union; nonunion; in manufacturing, e-commerce, even book publishing. 

Jon Wertheim: Will you do a deal that doesn't have employee ownership now?

Pete Stavros: In the U.S., no. We've been at this, almost 15 years. This is the new way we are operating. This is the model.

In February, we visited a recent KKR acquisition: Potter Global Technologies in St. Louis, a manufacturer of fire protection equipment. Employees were first learning the details of their new ownership plan.

It was part pep rally… 

Part polished TED-Talk… 

Afterward, we sat down with factory employees Debi Brumit, Craig Leppert, Mike Irby, Donna Henson and Gina Grant to hear their reaction. 

Gina Grant: I say we all deserve it.

Debi Brumit: We've been doin' it, but now we're gonna get benefits from it.

Mike Irby: Right, right. That's how-- right. That's how I look at it.

Jon Wertheim: We kept hearing employees start thinking like owners. What-- what does that mean?

Gina Grant: It's easy to spend somebody else's money. But when you work for it and you own it, it's-- it's a difference when it's your money. 

Jon Wertheim: These big checks, is that-- that's a motivation?

Gina Grant: Absolutely, to know the payouts and what it can potentially bring in my future. This is actually somethin' I have prayed for. It's personal to me.

The aim is for employees like these to get checks equivalent to at least a year's salary when KKR sells the company five or so years later. 

Stavros also offers workers free financial literacy training to better understand the economics. But he is quick to stress any payout depends on how the company performs, and whether KKR sells at significant profit.

Pete Stavros: It's risk. Now, there's no downside 'cause workers are not investing out of their own pocket. But there's definitely no guarantee. We need–we always say, "We need to perform for this to work."

Jon Wertheim: Have you had to have that ceremony on a shop floor of, "Look. We're-- we're selling. but unfortunately, there's-- there's no pot at the end of the rainbow"?

Pete Stavros: We haven't had that, yet. It will happen. That day will come. We've been fortunate, so far.

Pete Stavros has his critics… this, after all, is private equity, a sector often vilified for its aggressive business practices.

Jon Wertheim: Here are some of the critiques we've heard about-- about your effort. "It's greenwashing. It's white washing. It's mostly public relations. It's a watering down of the real employee ownership." What do you say to detractors like that?

Pete Stavros: When you look at what workers are getting, I just think there's too much substance for someone to shrug it off and say, "Ah. That's just-- that's fake."

Jon Wertheim: But come-- coming from a sector that doesn't traditionally act like this, that tends to cut jobs, and tends to squeeze profits, and tends to hollow out companies, do-- does that create an additional challenge for you?

Pete Stavros: Well, I don't agree with that characterization. 

Jon Wertheim: You don't?

Pete Stavros: No. I-- I think, certainly, mistakes have been made, both in our industry and-- and in capitalism. If all private equity was doing was plundering, I just don't think it would be where it's at, which is continuing to gain market share.

Stavros does concede that, when there is a sale, top executives stand to make orders of magnitude more than rank-and-file workers… tens of millions of dollars.

Pete Stavros: I think that's one of the things that I struggle with about emp-- employee ownership, in general. It's giving people a chance to get a leg up, but it is not going to solve the wealth inequality problem that we have. 

Jon Wertheim: You talk about this yawning wealth gap we have in the country. Does private equity help that gap or help create it?

Pete Stavros: So we're investing capital. And that capital is owned, for the most part, by wealthy people. That's just a fact of life. So in a sense, we are compounding the problem.

An imperfect messenger perhaps, but Pete Stavros has emerged as the leading employee ownership apostle. He's founded a nonprofit that teaches executives how to deploy the model. He criss-crosses the country preaching his gospel at business schools; and before D.C. lawmakers, advocating to update the tax code to incentivize employee ownership, which he hopes will soon be standard business practice, not an exotic exception.

Pete Stavros: This is an unbelievably popular idea with liberal progressives, and MAGA Republicans, and everything in between. 

Jon Wertheim: You can make this palatable to anyone on the spectrum.

Pete Stavros: That's right, it's not a government handout. This is a benefit tied to work. And, the outcomes are driven by performance.

And about performance… nothing has matched that of C.H.I. in Arthur, Illinois. In 2022, KKR sold the business for a ten-fold return. employees were again summoned to the factory floor. they knew they stood to gain; but not precisely how much

Jon Wertheim: Pete gets up there and announces what the payouts are gonna be. (laugh) You're smilin'. (laugh) You're smilin'. 

Brad Edwards: Obviously, I'm excited for myself. I mean, how could you not be? How could you not be? And they start-- they start tossin' those numbers around. 

Brad Edwards: You know, $20,000, $50,000, $100,000. Holy cow, you know? They haven't even got to 19 years yet, right? (laugh) You know, 'cause--

Jon Wertheim: Your-- your seniority level?

Brad Edwards: Yeah. 

Brad and Crystal were too modest to reveal exact numbers, but told us their check was in the mid six-figures. 

Jon Wertheim: Life-changing?

Crystal Edwards: Absolutely.

Brad Edwards: And not just for us, for our kids, too.

Crystal Edwards: Yeah. Our kids don't have to worry about us being stressed out about money. We're not working night shifts.

The Edwards family donated to their church… they finally paid off that credit card debt… and they started a college fund for their kids, and for Brad. Still at C.H.I., he's studying for his bachelor's degree at night. These stories rippled across Arthur after the sale, as C.H.I. employees had money to spend in—and on—the community. 

Jon Wertheim: I'm curious. Do you think this idea of, "Hey, employees can turn into employee owners," is-- is that a challenge, or is that, "Hey, it can happen in the middle of Illinois, it can happen anywhere?"

Brad Edwards: Absolutely, it can happen anywhere. You know, (laugh) look outside of my window. You're gonna see a house and miles of cornfields, (laugh) right? If-- if it can happen here, where can it not happen? 

But this might be the biggest payoff of all: employee ownership was not a fad, or a one-time windfall… After KKR sold, the workers got a stake in the business under the new owners. Why change a winning culture? Why mess with success?

Alright, it's Monday and wanted to lead off with this topic for a lot of reasons.

First, private equity has had a bad rap and KKR used to be the poster boy for "Barbarians at the Gate".

Well, fast forward to 2024 and KKR is leading the path on sharing profits with workers.

Somehow Pete Stavros, the co-head of global private equity at KKR convinced cofounders Henry Kravis and George Roberts that employee ownership makes sense and is a win for everyone: the companies KKR acquires, KKR and its global clients and employees.

Now, KKR isn't just any old private equity fund, it's an elite fund that started it all decades ago so when they do these initiatives and 60 Minutes covers them, it's worth paying attention.

As Pete Stavros says in the interview, this isn't a passing fad, this is something they firmly believe in and have been at it for 15 years in the US where it's their model.

And he's very honest about a few important things, namely, there are no guarantees whatsoever and this will not curb the growing wealth inequality in America.

So why is this so important and why cover it on this blog?

Because the employee ownership model has been successful and because KKR is one of the most important strategic partners of Canada's large pension funds as well as to US, European and Asian pension and sovereign wealth funds.

Basically the who's who of institutional investors invest with KKR so they have a stake in this model and since most of these funds take ESG very seriously, as does KKR, they want to ensure it's successful and make great returns over the long run.

I personally think employee ownership makes imminent sense for the simple reason that you want employees to have an owner's mindset and be part of the success of the company every step of the way.

There's nothing new or revolutionary about this idea.  

In fact, in Canada, Magna International founder Frank Stronach is a big believer in giving employees an ownership stake and has publicly stated so:

Giving employees a stake in the company they work for has been one of my guiding business philosophies. I’ve always believed that if employees have a real and tangible stake in the company’s success — if employees are part-owners — then they will be more motivated to produce a better product for a better price.

The reason why is simple: as an owner or part-owner, you instinctively want to do everything to the best of your abilities. You want to produce work of the highest calibre because you’re part of something you take pride in. And most importantly, you know that your contributions to the bottom line will be financially rewarded.

Again, this doesn't guarantee success but it's a better alignment of interest between founders/ owners and employees and shareholders/ investors. 

It also allows employees to participate fully in the process of capitalism.

In my opinion, the greatest student of capitalism was Karl Marx, not Adam Smith (close second). 

In fact, Marx needed to be a great student to really understand the limits of capitalism and vigorously critique the system.

He wasn't right on everything but he definitely understood the structural issues plaguing the system and it would be very unwise to dismiss his critique or attach his body of work to Marxism or communism (Marx had nothing to do with either, just as Christianity has nothing to do with Christendom).

Would Marx approve of employee ownership? No doubt in my mind but he would also ruthlessly expose other structural flaws in the system that ensure wealth inequality continues unabated.

Now, I don't want to make it sound as if Henry Kravis, George Roberts, Peter Stavros and KKR are forging a new path for capitalism but if you take a step back and really think about it, this is in essence what their model is doing.

And it's interesting that this is a private equity powerhouse leading this initiative because it lends credibility to it.

Sure, publicly listed companies have share matching programs for employees' 401(k)s, but it's not the same thing because the payoff here can be tremendous if the company succeeds and to be truthful, macro and market conditions remain ripe for a clean exit.

All this to say, not only do I welcome this initiative, I'd really like to see it expanded to other private equity powerhouses and hope one day this model is the "norm" and all pension funds and sovereign wealth funds will back it up and even demand it.

Again, this model will not cure vast wealth inequality, it might even promote more of it, but it will share the spoils of capitalism with everyone in the food chain, especially front line workers that have been excluded forever.

When Frank Stronach calls his employees "partners," I believe him. He sees their value in determining his company's ultimate success.

Lastly, I realize that ESG is far from perfect and doesn't sit well with everyone.

Even Warren Buffett has issues with it and rejected six proposals addressing environmental and social policy issues over the weekend at Berkshire Hathaway Inc shareholders meeting.

But employee ownership isn't about ESG, it's much more profound, it's about participatory capitalism and rewarding everyone fairly for the success of a company.

So, let's see where this goes recognizing the inherent limits and subtleties and let's hope this new model leads to a better world for future generations.

It would be wrong for me however not include another key component of success. On top of employee ownership, I'd like to introduce a defined-benefit pension plan for all private sector employees that will ensure dignity and security of workers as they retire.

And no, I'm not a socialist or Marxist, far from it, I'm a proud Conservative who believes in capitalism and incentives. I eat what I kill and know firsthand what having an owner's mindset and putting in sweat equity is all about.

I just like this model and think it deserves to be scrutinized more closely and ultimately adopted as the standard model in the entire private equity industry (publicly listed companies can also learn a lot here).

Below, 60 Minutes reports private equity executive Pete Stavros has emerged as an unlikely employee ownership advocate. He says giving the rank and file a stake in their companies is good for workers, and good for business.

Also, a high school teacher didn’t expect a solution when she set a 2,000-year-old Pythagorean Theorem problem in front of her students. Then Calcea Johnson and Ne’Kiya Jackson stepped up to the challenge. What a great story, makes you wonder why aren't all schools modelled after this one?