The Power of Clearly Seeing The Future
A Conversation With Ken Baker
CEO, NewAge Industries
Chairman, Pennsylvania Center for Employee Ownership
Ken Baker is the CEO of NewAge Industries, which is a family business that has been in operation since 1954. Ken knew he wanted to turn the company into an employee-owned business (ESOP), so he spent time learning from other leaders and eventually co-founded the Pennsylvania Center for Employee Ownership (PaCEO) to help other business owners form ESOPs with trusted, knowledgeable advisors.
Ken believes that ESOPs are a fantastic fit for many business owners and aims to bring awareness to companies as well as professional advisors. He also helped start and is a board member of the Employee Ownership Expansion Network (EOX) which is taking the PaCEO state center model to 20 other states to promote employee ownership.
Leading With Courage Academy: What makes you smile in the morning?
Ken: That I’m alive and that my body is functioning the way it should be and that I have a lovely wife. My daughter is also doing well at college and she knows what she really wants to do now, so that makes me smile. Also, I feel like the work that I’m doing with ESOPs is changing and improving lives that would not have been changed.
What’s the most important thing I should know about you?
That I have high ethics, that I care about people and that I’m trying to change the world.
How did you get into the position you have today?
Well, it starts with NewAge, which is a family business my father started 65 years ago. I’ve been involved with it since age six, and I was the janitor all four years of high school, cleaning toilets and washing windows. I’m severely dyslexic and I dropped out of college after high school. I dropped out because I didn’t know I was dyslexic at the time. I’m 66 years old and back then, they didn’t diagnose it. I found that I was not learning well -- being in a classroom, being lectured to. I’m a tactile learner.
So, I worked for another organization, a marketing communications company. I was a straight commission salesperson, paid my own expenses for about 10 years and then I was promoted to the vice president of sales. I also knew that the person who was running the plastics group for NewAge was retiring and I met with my father, who was semi-retired. I was thinking about my future because I wasn’t going to get an equity stake at the marketing communications company. I had done just about everything to be done at that company in the way of sales and marketing and I was looking for a bit more challenge. So my father took a shot at hiring me. After working in the company with my brother for a few years, I realized my brother and I had different management styles, I bought him out of NewAge. A couple of years later, I bought out my father when he was in his mid 80s.
During that time, I went to a seminar that talked about employee ownership as a business model. So I flew out to Chicago for a two-day program run by an ESOP services provider and got totally absorbed in the ESOP concept. And I said to myself, “this is it.” When I get control of the organization, this will be the type of model I’d like to install into NewAge.
Once I had ownership, I wanted to let the organization know what my thinking was. We had a newsletter called the Bulletin Board, which talked about all the things that were happening in the last quarter like our financial results, new team members and helpful hints. So I decided, in 2000, to do a futuristic newsletter dated 2006 to show what the company would look like in the future. One of the main stories was, NewAge was going to be an ESOP and Ken was going to sell 30% of the company to the employees through the ESOP in 2006. I didn’t want people to leave the company before the party started because when you go ESOP, that’s when a lot of things change for the better with the company. It took me two years to research things with my controller, and learn more about what goes into running a successful ESOP and how to move the process forward.
So in 2006, I sold 30%, and we did training because many employees do not know about being an owner or knowing how to make a profit in companies. So we have to train them.
What was your driving force behind starting PaCEO? I went to the annual meeting of the National Center for Employee Ownership (NCEO), and there was a session about state centers. At the meeting, the facilitators asked if any volunteers would like to start a state center in their state. A gentleman named Dan Adley and I raised our hands.
We have been putting together this state center model with the help of Kevin McPhillips the Executive Director of the PaCEO. The whole mission of the PaCEO is to create awareness of this business model of employee ownership in the form of ESOPs and co-ops in Pennsylvania.. We do that through advertising on the radio, conducting webinars, seminars, and having newspaper articles and blogs being written.
What’s the biggest obstacle to organizations forming an ESOP?
It’s awareness. A person like me doesn’t know that this option is available and if he or she does know a little bit about ESOPs, it’s probably distorted information. It’s likely they have probably never sat down for an hour and learned the whole nine yards of what an ESOP is and how it works. What are the tax benefits? What are the benefits to the organization and what are the benefits to the employees?
Do you think this lack of awareness is primarily due to advisors not being aware of the structure?
Definitely. There are some trusted advisors who don’t understand ESOPs. And when a trusted advisor doesn’t understand something, they may be inclined to talk negatively about it.
Let’s say the business owner says to their accountant, ‘you know, I’ve heard a little bit about this ESOP thing.’ If the accountant doesn’t understand it, I’ve found some of these trusted advisors will say negative things about it because they don’t want to look less than knowledgeable in front of their clients. And that’s a natural human situation. We, at the PaCEO are trying to educate all of these trusted advisors, whether it be an accountant, a lawyer or a financial advisor. When the advisors are informed, there’s a greater likelihood that they’ll be promoting ESOPs or at least not pushing back against it.
I’m going to go out on a limb here and say an ESOP is the best business model for a wide percentage of business owners. If a trusted advisor does not mention ESOP to their client, when the client is ready to transition their business, are they really doing their job? Are they actually providing ill advice to their client? And that may sound very strong, but I genuinely believe that it’s kind of like an accountant that works with you and he or she has have not researched one of the best tax benefits that’s available to you. So they don’t present it to you and, in effect, are under-serving you.
There’s such a high trust factor in these advisors that if they don’t mention ESOP or they push back against it, the owners tend to be swayed by that. With the PaCEO, we have this concept called a thousand ambassadors. We’re looking for a thousand ambassadors across the state to be educated about ESOPs.
The ESOP business model is not the answer for all selling shareholders. We talk about this all the time. It has to be the right client for the right business, but we also feel like the trusted advisor should be well educated about it. So when they see a client that fits the criteria for the model, then they should be talking about it.
What mistakes have you made along the way as a leader of NewAge? At the top of the list was probably some hiring decisions. I ignored some of my processes in hiring some people that I probably shouldn’t have hired. I was in too much of a hurry. I put too much emphasis on education when I should’ve been focused a little bit more on experience. I’m a very trusting person. I believe in trusting you until you give me a reason not to. That philosophy in life can sometimes burn you, but I think it has paid dividends for me on the other side. The opposite philosophy, I don’t trust you until you show me that I can trust you, makes you a very hardened and suspicious person and I make sure I fight against that.
How did you develop as a leader? I was a member of a Vistage group for nearly 30 years. I took their teachings to heart. I took detailed notes and I implemented a lot of things that I learned. Also, my favorite saying is, ‘a wise man learns from his mistake. A wiser man learns by somebody else’s mistake.’ I take that to heart and when somebody says they had a problem, I always ask what was the problem? How did it happen? And try to learn from their experience so I don’t have the same issue.
Can you tell me about a person that had a tremendous impact on you as a leader?
My father. He used to say if you want something, you have to be able to afford it. This advice led me to avoid debt for a very long time. I learned from the people that were in my Vistage executive group. I learned from my NewAge team, my executive team leaders, people running our plant. I learned from all of them on a day in and day out basis. I’m the type of guy that does managing by wandering the floor every day. If a shipping guy on the floor stops me and has a question or makes a comment, I take that stuff to heart.
What job did you hate and how did that impact you as a leader?
When I dropped out of college, I started looking for a job and I saw an ad in the newspaper about selling Great Books door to door. It was a straight commission sales job. The job was based on getting leads from Great Books and then calling the leads to make an appointment. The premise of the appointment was to do an educational study and survey. So, I set up my first appointment and I got into the house and I did the survey. Then after the survey, I was supposed to say, “Well Mrs. Smith, education seems to be very important in your life based on this survey and I just happen to be a representative of Great Books and I’d like to introduce to the educational benefits of Great Books.” I got into the house under false pretenses, doing a study. I just couldn’t bring myself to continue the falsehood so the next day, I quit. That was the day that I figured out that I had an ethics line in the sand and it became apparent.
I learned so much from those bad experiences, more than I probably learned from the good ones. The bad ones don’t leave you with wealth, but they make you a better person.
What sort of mindset do you think the leader of an ESOP has to have?
I feel that a leader of an ESOP has to care for something. Whether it be caring for their legacy, caring for the people that have helped them build the company or caring for their community.
Those are three compelling reasons to care. Are they all equally important or do you see a hierarchy? No, I think it depends on the person. I mean, you can have somebody who started the company in their garage. It’s now it’s a $50 million company and their name is on the building, products, a foundation, and checks, so their legacy could be their highest priority.
And then you have someone who bought the company 15 years ago and now wants to retire. But they see these old-timers that have been with the company forever and realizes that they couldn’t have done it without them. So his/her priority is to care for them.
And then you have another person that knows that if they sell the company to their competitor, the competitor will move the company out of state/country. Then the local community will then be devastated if those 500 jobs get moved because it’s only a 5,000-person community. So that person’s priority is community.
What’s not the highest priority is the financial consideration. That’s always there, but it’s not top of mind. And that’s because you can get more for your company if you sell it to a strategic buyer then what an ESOP will pay. An ESOP can only pay financial value, while a strategic buyer can pay strategic value. Meaning 1+1 = 3.
What’s the hardest decision-making moment you’ve had to face as a leader of an ESOP?
It’s the difficult decisions around letting people go. When you fire somebody, you’ve changed their life immediately, and that weighs on me.
How often have you regretted it after the fact?
I don’t think any. When you get fired from NewAge, you’ve done something pretty wrong. As they say, you have work to get fired from NewAge because we’re a kinder, gentler organization, so you’ve probably violated the NewAge Basics. The NewAge Basics are 21 rules that deal with ethics, behavior, safety and ownership. I teach a NewAge Basics class to every new team member. You can see it on our website here: http://www.newageindustries.com/basic-guiding-principles.asp
What’s the best advice you’ve ever given or received?
The whole idea I mentioned earlier of a wise man learns by his mistakes and wiser person learns by someone else’s mistakes.
What advice have you gotten that you completely ignored?
The saying ‘hire slowly, fire fast.’
What advice would you give to someone who’s moving into an ESOP leadership position for the first time?
You need to be surrounded by excellent, experienced advisors. You need to have people that have done this work many times before. It’s like if you needed a knee replacement and you ask the doctor, “how many knees have you done?” And he says, “One, but I’m sure I can do yours.” Run away. You want the doctor that has done 3000 knees, right? So you don’t want your corporate lawyer to do your ESOP documentation because he’s going to charge you an unbelievable amount of money to learn on your dime. There are specific ESOP lawyers out there. You want valuation firms that do ESOP evaluations. You don’t want a valuation firm that has done one or two.
You also may have to change your accounting firm because your financials look different and they have to be presented to the bank differently. That’s sometimes a downside because some people get very attached to their accounting firm.
The CFO doesn’t have to understand all the details, but he or she has to understand the overall structure and the mission and the benefits of the ESOP. You need a person inside that is willing to learn and isn’t begrudging about it. So, when a CFO doesn’t have ESOP experience, they have to be very open to learning and learning quickly about it. If you have a CFO that is an old dog and can’t be taught new tricks, you may have a problem. Their eyes should get big with excitement, not big with fear.
Is there one story you tell non-ESOP leaders about your experience with employee ownership?
Yes, the fork truck story. It’s what changes the mindset of the employees. As I mentioned, I do managing by wandering around (MBWA) every day. I say good morning to team members and catch up on what’s happening with them. It allows people to engage with me and I engage with them. I have an open-door policy, but it’s a very nervous situation walking into the CEO’s office, so I try to make myself available in other ways.
So one day I’m doing the MBWA. You have to understand how we have lots of fork trucks in the business. We have fork trucks taking raw materials to the equipment to make the tubing. And we have fork trucks carrying the finished goods back into the warehouse to be stored. One day, I see one of the fork truck drivers “laying a patch” with the fork truck, spinning the wheels. And so I go up to the fork truck driver and I look him in the eye and I ask, “Why is it that you’re beating up your fork truck?” And he kind of looks at me with big eyes and then I say, “Here’s a better question, John, why are you beating up Sally’s fork truck?” And I point to Sally across the manufacturing hall and I say, “Because she owns that fork truck too.” And the fork truck driver hangs his head down. It’s a different conversation. It’s a different way of talking about and positioning work in the workplace. What do you tell prospective employees about why they should work for an ESOP? Many reasons. Number one, they actually own a piece of the action. Their actions can make them more money at the end and they’re also linked together with everybody that they work with so there are less conflicting goals. The main goals are making the company more profitable long-term, to help create wealth for all and change the idea of work. I have people that have told me over and over that NewAge doesn’t feel like work. They’re energized because of their involvement. It’s engagement and it’s a different idea of work and that’s pretty cool.
Is there anything you do to help employees understand the ESOP culture at NewAge?
I teach a five-hour course about ESOPs to all new team members. Five one-hour classes over a month and a half. There’s homework, there are tasks, there’s a workbook and group activity. It’s not just about ESOPs, either. We talk about personal budgeting. We talk about personal retirement. Then we talk about the ESOP and what the rules are. We end with what can you do in your job to increase the share price and dividends? How can you make more profit for yourself, your team and the company?
What do you think is the biggest challenge facing ESOP leaders today?
Repurchase obligation is one of the biggest threats to the longevity of an ESOP, especially with fast-growing companies. What happens is the share price goes up like a rocket because the company is growing fast. Because it’s also reinvesting profits in the business, it’s not generating enough cash to fund to buy the shares of the retiring employees. There’s this obligation out there and many owners are forced to sell their companies because they haven’t put enough money into the ESOP trust to buyback those shares. So you have to have the discipline to put a portion of your profits and cash into the ESOP to fund that obligation. You don’t want an unfunded liability.
Do you see ESOP transactions becoming more complicated or becoming simpler?
They’re probably only going to get more complicated.
Do you find that the ESOP advisors drive that or do the needs of the seller drive it?
It’s probably going to be driven by the Department of Labor, setting up new rules. But I really don’t know about that.
What are you doing to ensure you continue to grow and develop as a leader?
I talk to other CEOs about all sorts of things. I’m a lifelong learner. I read even though sometimes it’s difficult due to my dyslexia.
Is there one book that comes immediately to your mind that you recommend to others to read?
“Prevent and Reverse Heart Disease.” I’ve given away 950 copies of that. And the other book is “The China Study.”
What excites you right now as a leader?
Watching people grow, seeing people go from a wet behind the ears 21-year-old kid to six, seven years later where they’ve gotten educated, they’ve moved two or three times in the company and they’re doing cool things for the company and they’re having a ball because they’ve seen their growth. And that happened last night. A husband has been working for our company for 20 years. His wife has been with us for about six years. When she got here, she was a little bit of a handful. Over the last six years, she has changed fundamentally, went to school and took her knowledge from that schooling and put it to work. And she is just a gem now. It’s wonderful to see a person just transform into a very highly productive, satisfied team member in the organization.
When you retire, what would you like to hear the master of ceremony that your retirement party say about you?
I supported the team. I supported these people. I stood by them. I cared about them and that they’re appreciative of that support.
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