A Stake in the Outcome

Living in San Francisco while working in San Jose has the drawback of a long, hour-plus commute.  Except in my case, where it’s somewhat of a benefit:  It’s my time to continue my business education while school is out for the summer.  You see, most of the large tech firms in Silicon Valley send buses to San Francisco to pick up employees – you could call it a green initiative, but it’s moreso a tool to attract young talent that prefers city life over the suburban Valley – and eBay is no exception.  So, with each ride in the morning and afternoon, I take the opportunity to work on the list of books my professors recommended to classes for additional insights.

The first one I picked up, Jack Stack’s A Stake in the Outcome, provides a narrative of a company’s journey to create what Stack calls an “ownership culture.”  The company (which he founded and managed), SRC Holdings, began as an employee buyout of a factory owned by a large machining firm, and developed a somewhat democratic management style.  It was one of the first companies to implement an Employee Stock Ownership Plan (ESOP), and it used the plan to great effect in incentivizing positive behavior.

A couple of Stack’s points about creating an effective ownership culture jump out at me:

1. It requires all employees to understand the fundamentals of business.
2. It requires employees to be invested in the business long-term.

The first point relates to a concept he calls the Great Game of Business – effectively, it involves practical business training for all employees by evaluating them based on real business metrics and teaching them what the metrics mean.  For example, a team of line workers might receive a higher bonus if the factory improves its cash balance.  Once the employees understand what contributes to the cash balance, they may find ways to reduce throughput time in order to reduce the investment in inventory, for example.  But even more powerful than reaching for the bonus is the realization of the direct relation of the metric to the health of business, and therefore its stock price.

The effectiveness of that part requires Stack’s second point.  Specifically, he states that employees need to be invested in the company long enough for the feeling of ownership to sink in.  Stock ownership needs to be a long-term deal with employees, not an additional method of compensation.  He expresses his reservations about the route Silicon Valley firms have taken with stock ownership, with options vesting after a year or two:  His belief is that a year, or even a few years, is not enough time for ownership to take root, where an employee feels that he is invested in the business for the long-haul and that his actions have a measurable effect on his business (and therefore his livelihood).  At SRC, stock options typically vest in seven years.

What Stack doesn’t specifically call out, but which I believe is critical to creating an effective ownership mindset, is the requirement of the business to be small in size.  Towards the end of the book, he talks a lot about SRC’s constant search for areas in which to spin off companies, which would create opportunities for new management teams to experience the power of leverage and the power of ownership of a small business.  Without the smallness of size, these effects, and thus the lessons, would be greatly reduced.  This concept is echoed by Clayton Christensen in The Innovator’s Solution, where he states that teams formed for disruptive innovations need to be separated (organizationally and often physically) from the larger business so that they can get excited about small numbers and can be forced to be impatient to generate profits, just as a startup would.  I love thinking about this topic of creating successful innovations from within the context of large organizations, so I’ll be looking for more literature on it.