The Agency Business: ESOPs provide marketing tool, staff morale boost for firms

Transitioning into a PR agency that takes part in an employee stock ownership plan requires research and a good strategy, but firms that take the leap enjoy staff and client benefits.

Transitioning into a PR agency that takes part in an employee stock ownership plan requires research and a good strategy, but firms that take the leap enjoy staff and client benefits.

Very few PR agencies, it seems, are employee-owned. That's something of a mystery to those that are - because they are cheerleaders for the setup. The main reasons for a firm to transform itself into an employee stock ownership plan (ESOP) are to have an exit strategy for a retiring owner (PRWeek, July 12), a way for the agency to remain independent, or a method for a large company to spin off a business. Michael Keeling, president of the ESOP Association in Washington, DC, says that use as an exit strategy accounts for about three-fourths of ESOPs. That seems to be the case for some of the larger PR agencies that have become ESOPs. Barkley Evergreen & Partners, which includes a PR firm in addition to ad and other marketing divisions, became an ESOP in the late 1990s. "When [founder] Bill Fromm was looking to retire, one decision we made was we did not want to sell out to a large, multinational firm," says Mike Swenson, president of Barkley Evergreen & Partners Public Relations. Barkley Evergreen has 325 employees, 21 in the PR firm. Padilla Speer Beardsley, with 85 employees in Minneapolis and New York, became an ESOP in 1992. It became 100% owned by employees last year. CEO Lynn Casey says the move was to buy out former CEO John Beardsley and other partners when they retired. Kansas City, MO-based NKH&W recently became an ESOP, and at the same time it changed its name to Nicholson Kovac (PRWeek, September 6). Jim Bergeson, president of the Minneapolis office, says a major impetus was for the firm to stay independent. Proponents say being employee-owned raises the morale of staff. ESOPs tend to have low turnover - something that makes clients happy. (A 2001 study by two Rutgers University professors found that ESOPs appear to increase sales, employment, and sales per employee by at least 2.3% per year.) Bergeson had previous experience with ESOPs, having been the CEO of Minneapolis-based Cole & McVoy, which was employee-owned before it was bought by Toronto-based MDC Partners. He says that after the employees bought the firm, he "saw a [big] change in attitude, even from secretaries, who said, 'We ought to print that out on plain paper; you're wasting money.'" It also helps with clients. "Employee ownership really resonates with a certain kind of client, and they're usually a client that also is interested in charting their own course," Casey says. For that reason, it's a rare employee-owned company that is shy about publicizing that fact; being an ESOP can be part of an agency's own marketing. Casey says that one difficulty of an ESOP is that the money put aside for it could be used for other purposes. Also, the law requires ESOPs to have enough money on hand to repay any owner who leaves the company (called "the repurchase obligation"). Experts advise companies interested in becoming ESOPs to do a lot of research; to use good lawyers, accountants, and banks that specialize in the field; to get a good firm to put a value on the company; and to pick the employees who will act as trustees. Keeling says there are companies that act as general contractors for companies becoming ESOPs (or often a lawyer can play that role). He also says that there are outside administrators who can help a company comply with the law, in addition to ESOP ownership-culture consultants. Keeling says that company leaders must decide if they're comfortable with an ESOP because it means sharing financial information with employees. But, he says, as much as companies worry about that information leaking out to competitors or others, he's never seen it become a problem at any of the ESOPs he's dealt with. Finally, Casey offers this advice: "You [must] be clear about your purpose. Is it an employee benefit, a buyout vehicle, or both? Some companies - and we were a bit guilty of this in 1992 - aren't comfortable about buying out owners. They'd rather talk about the finances of the firm, if they're going to talk about finances at all. But once you get into the finances of individual shareholders, the conversation can get interesting." Employees' rights and responsibilities Below are Padilla Speer Beardsley's "Rights and Responsibilities of Employee Ownership" Rights
  • To share in the financial success of the company
  • To vote on issues affecting the company as defined in the ESOP plan
  • To be well-informed about the management and strategic direction of the company
  • To question business practices that you do not believe are in the company's best interest
  • To have access to the information that illustrates how your actions and decisions affect company profitability Responsibilities
  • To contribute to the financial success of the company
  • To exercise your right to vote and to do so based on careful consideration of the facts at hand
  • To accept and support management decisions and initiatives
  • To help find solutions and not just point out problems
  • To evaluate your actions and decisions from an ownership perspective

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