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KKR Wins by Treating Workers More Like Owners

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If you had $1 million to invest in a better workplace, how would you spend it? For factory workers at C.H.I. Overhead Doors, the answer was air conditioning.

As part of its investment in C.H.I., KKR & Co. set aside about $1 million each year and asked its hourly workforce to decide how to spend it to improve their day-to-day experience. “We said, ‘We’ll follow your lead, wherever you want to go, we will spend it. But we don’t want a new $1 million piece of equipment. We want life to be better in the factory,’” said Pete Stavros, co-head of Americas private equity at KKR, which acquired C.H.I. in 2015 and is now selling it for $3 billion to steelmaker Nucor Corp. A C.H.I. manufacturing plant in central Illinois would heat up to more than 100 degrees some days during the summer. “Those days were when people got hurt because they were exhausted or in a rush,” Stavros said in an interview. “We put the AC in, which was a massive undertaking for 1 million square feet of uninsulated space. The next summer, there were fewer injuries and, by the way, the quality is higher. It’s about listening to employees. They weren’t overtly saying this will make us more safe. They were saying this will make us happier and help us enjoy our jobs more.” 

Read more: What Does Nucor See in Garage Doors? An Opening

Thanks in part to the air conditioning but also a methodical, data-driven assessment of how and when injuries were happening, the rate of incidents reportable to the Occupational Safety and Health Administration fell 58% over the course of KKR’s investment. The next year, C.H.I employees chose to spend their $1 million annual budget on a cafeteria with healthier food options. The following year, it was better breakrooms in the newly air-conditioned plant. The latest installment went to fund an on-site health clinic that saves employees in the rural community from having to make a 45-minute drive for simple checkups and prescriptions. C.H.I. was the first company where KKR instituted this annual employee-driven spending, but it’s replicating the blueprint elsewhere. 

The program is an offshoot of Stavros’ passion project of putting equity in the hands of rank-and-file workers with a goal of making those employees more invested in the company’s operational health and chipping away at income inequality. At C.H.I., all 800 company employees became owners of the company alongside KKR. These equity grants were on top of, not a replacement for, wages and benefits and were free to those making less than $100,000 a year. The result is that everyone at the company is in line for a windfall in the sale to Nucor. KKR is set to earn 10 times the original equity it invested in C.H.I., making the return one of its highest ever for a US buyout. Meanwhile, the average hourly plant worker or truck driver will receive a $175,000 payout on their ownership stakes, while some long-tenured staff will receive as much as $800,000 before taxes. A big reason the payouts will be so high is because of the operational strides C.H.I. has made: Revenue more than doubled on an organic basis while earnings before interest, taxes, depreciation and amortization has increased almost fourfold. 

Watch: Should Workers Be Owners, Too?

By any measure, C.H.I. is a massive success story for the concept of equity grants for all. KKR has broad equity-ownership programs at 25 companies and counting. This is now the firm’s “only way of doing business in the US,” Stavros said. Every time I hear about this effort, my first thought is, “Why aren’t more companies doing this?”

Stavros has started a foundation called Ownership Works, which aims to encourage rank-and-file equity issuance and provide a forum for sharing best practices. There are more than 60 partners, but the vast majority of them are financial and professional services companies that will lend programmatic support, labor advocates, foundations and other private equity firms who have committed to rolling out similar programs at some of their portfolio companies. The number of public company partners is a mere two. They are manufacturer Ingersoll Rand Inc., which issued $100 million in equity to employees as part of a 2017 public offering for the former Gardner Denver after a KKR buyout and an additional $150 million of grants in 2020, and motorcycle maker Harley-Davidson Inc., which cited KKR as inspiration for a decision last year to distribute stock to 4,500 employees, including hourly factory workers.

Broad-based equity ownership can work in a range of industries, but manufacturing is a particularly good fit because there tends to be less turnover at the hourly employee level than, say, in retail or food-service businesses. With growth difficult to come by in many corners of the industrial world, companies rely heavily on productivity improvements, which tend to be best carried out by those working on the factory floor rather than the headquarters executives who usually receive stock payouts. The industrial sector also has a particularly acute labor shortage that companies have been complaining about long before the latest pandemic disruptions. 

More public manufacturing company CEOs should be thinking about out-of-the box ways to bolster productivity and retain employees. But I’ve asked quite a few of them over the past two years whether they would ever consider issuing equity to their factory workers, and the response is usually a mixture of declining to answer, pointing to other programs like 401(k) matching that are nice but aren’t capable of generating the same kind of wealth, or offering myriad excuses for why broader equity grants won’t work for their particular workforce.

“It’s going to take changing a lot of minds and hearts and case-study building to get people to think differently,” Stavros said. “We’re there on climate. If you pull any sustainability report on climate, you won’t see return-on-investment metrics. No one cares. When it comes to labor for some reason, we’re still stuck in this mindset of ‘show me the numbers.’” 

To be fair, making these broad equity-distribution programs successful isn’t as easy as flipping a switch. They require a significant amount of paperwork, investment in proper personal financial education for staff and an overhaul of training to help workers think through decisions like owners. At C.H.I., as part of the equity payout from the Nucor deal, all 800 workers will receive a year of prepaid financial coaching through Goldman Sachs Group Inc.’s Ayco arm and tax preparation services from Ernst & Young. Private equity also has the benefit of more concentrated decision-making, and public company boards tend not to be big risk takers.

But allocating a certain percentage of profits each year to a workplace improvement budget that employees have a direct say over involves a fairly minimal amount of financial capital and effort on the part of the company but a potentially material payoff in terms of workforce engagement and quality of life. This seems as if it would be a very easy first step for companies that say they care about doing the right things for society and are serious about investing in a more committed and productive workforce. There are likely countless other factories nationwide where trappings like air conditioning and on-site health clinics could make a big difference. 

More From Other Writers at Bloomberg Opinion:

• CEOs Went Quiet About Equality During Covid: Chris Hughes

• The CEO Pay Ratio Rule Is a Failed Experiment: Michelle Leder

• Walmart Truckers Pull Even With Junior Bankers: Jared Dillian

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. A former M&A reporter for Bloomberg News, she writes the Industrial Strength newsletter.

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