The Legacy Problem

by Marjorie Kelly

It was April 11, 2000 when the legacy problem burst into view. That was the day the Ben & Jerrys board was forced by law to sell the premier socially oriented firm in America to multinational Unilever, against the wishes of CEO Ben Cohen. In the three years since, Ben & Jerrys has seen its social mission begin to seep away – Unilever has laid off one in five B&J employees, stopped donating 7.5% of profits to the Ben & Jerrys Foundation, and hired a CEO Cohen didnt approve of.

Social firms are being sold to large public corporations in droves these days. The July news of Horizon Organics sale to Dean Foods is only the latest in a long line of sales – Odwalla to Coca-Cola, Aveda to Este Lauder, Stonyfield Farm Yogurt to Groupe Danone, Cascadian Farm and Muir Glen to General Mills, Seeds of Change to M&M Mars, Boca Burger to Philip Morris, Kashi to Kelloggs.

Socially responsible business is entering a new era. The founders era is passing. Entrepreneurs have met the challenge of how to manage in socially responsible ways, but few even recognize the new challenge ahead: how to create the architectural forms that can hold social mission for generation after generation to come.

Companies run on the juice of the magical, visionary founder,” says David Mager of Meadowbrook Lane Capital in Springfield, Mass., a socially responsible investment bank that put together an investor group that tried to buy Ben & Jerrys during the takeover battle. When a company grows large or changes hands, “then you need to build social responsibility into the various protocols and processes of the company,” he says. “t will disappear if its not institutionalized.”

The task is far more difficult when a company is public, where the system design enforces a focus on one value: maximum profits. The law presumes maximum gain is all shareholders care about, and it permits Wall Street to use tactics like lawsuits and hostile takeovers to keep firms focused solely on the bottom line.

In terms of social mission, going public is thus the same as being sold outright, for both represent transition points where founders lose the ability to keep their mission front and center. Greg Steltenpohl of Odwalla made an observation at a Social Venture Network conference years ago, after he took his firm public. “I used to be in the business of making great juice,” he said. “Now Im in the business of making money.”

Many private firms also suffer mission loss – as Jack Quarter of the University of Toronto showed in his study of 11 socially innovative private firms in six countries, published in his book Beyond the Bottom Line: Socially Innovative Business Owners. Depressingly, Quarter found that among these 11 social companies, reversion to traditional management occurred in every single case.

As we grapple with this issue, we see several themes emerging:

1. Ownership remains primary in determining company values.
“The reality is owners get to decide” a companys mission, emphasizes Bob Wahlstedt, co-founder of Reell Precision Manufacturing in St. Paul, an employee-owned firm. “You cant control what future owners will do, you can only influence who the owners will be,” he says. In recent years, the three founders of Reell have passed 30% of ownership to their children, 40% to employees, and kept 30% themselves. Leadership of the firm, with $21 million in revenue, has been passed to a pair of co-CEOs.

Reell – whose name means “integrity” – is an example of a successful legacy transition. Ethical practices continue at the firm, such as limiting executive pay to seven times that of entry-level workers, and donating 10% of profits to charity. But the real vigor of legacy was demonstrated in 2001, when the company wrestled with how to manage a 30% drop in revenue.

Management decided to cut pay rather than make layoffs, and executives took cuts of 16%, mid-level workers took cuts of 7%, while lower-paid folks took no cuts at all. Avoiding layoffs was possible because shareholders were willing to take their own profits to zero, notes co-CEO Bob Carlson. This paid off when orders picked up and the company could resume production quickly, because a seasoned staff was on board.

Shareholders at public companies lack similar power to express humane values. Kodak, for example, was not able to avoid layoffs like Reell did – even though it has a long history of social responsibility, tracing back to founder George Eastman. The companys practice had been to reduce staff through voluntary early retirements. Then pressure came down from Wall Street and Kodaks board in 1993 to make 10,000 layoffs. CEO Kay Whitmore refused, and he was fired. Two weeks later the cuts were made.

The moral of the story: In the long run its not founders or CEOs who control company mission, its owners.

2. Values imbedded into a business model enjoy special protection.
When Gary Hirshberg sold Stonyfield Farm, he believed organic ingredients and social mission were “genetically encoded” in his company, so the mission was safe no matter who owned the company. That may be true for something as integral to a product as organic ingredients. But its probably less true for issues peripheral to consumers – like layoffs or employee benefits. Some values are less like DNA and more like barnacles on the side of a whale: easy to knock off.

The best-protected values will always be those that are closest to what makes a company tick. “Values have to be part of the mental model of what makes the business a success,” says Anita Ryan, who runs the Family Business Success consulting firm in Bloomington, Minn.

Building Mission Into Structure at Equal Exchange

The most effective way to address the legacy question is at a companys founding, when anything is possible. An example of this approach is Equal Exchange (EE), a $10 million dealer in coffee, tea, and cocoa, which has a unique worker-owned cooperative structure. The company serves small coffee farmers in developing countries by paying fair trade prices. EE is known for its fair dealing with farmers providing advance credit for crop production, paying a guaranteed minimum price, and trading directly with democratic farmer cooperatives. Whats less well known is how elegantly EEs legal structure supports its social mission.

To safeguard the interest of employees, the three founders gave away most of their ownership, incorporating as a worker-owned cooperative where each employee has one share and one vote. Employees alone may nominate board candidates, electing all nine directors and themselves holding six seats. The board hires and supervises management, so the president is accountable to those he or she manages.

To prevent a worker-owner aristocracy – where some hold stock and others do not – membership is open to all employees. The top executive can earn no more than three times the lowest paid worker, a rule only the worker-led board can change. To ward off pressure to cash in, the founders added a dissolution clause: If EE is ever sold, net proceeds will be given to another fair trade organization.

In raising capital, the company uses below-market debt and non-voting equity. The conceptual change is profound: the workers hire capital, capital doesnt hire the workers. There is no speculation: Stockholders can only sell stock back to the company. They do, however, enjoy a healthy average 5% dividend annually.

17 years later, that foresight has been affirmed. Employees have begun to take real psychologica
l ownership of the cooperative, making the bylaws and division of profits even more egalitarian, and creating new structures to increase employees role in and capacity for governance. Two of the three founders have gone on to other pursuits in fair trade.

Company revenues have grown an average of 35% annually, and today there are 40 worker-owners with 14 more in line. EE remains a leader in the fair trade field it pioneered. Best of all, it has no chance of hostile takeover, and little chance of losing its mission. The legacy problem was solved before it ever arose.

by Rodney North

3. Protecting legacy through contract can work – but its difficult.
When the sale of a company is imminent, the most immediate way to protect legacy is through a contract, which can preserve certain details of social practice. This is the approach Mel Bankoff took in August 2002 when he sold Emerald Valley Kitchen in Eugene, Ore. to the public corporation Monterey Pasta Co. of Salina, Calif.

For Bankoff, selling to employees wasnt an option. It would have required a loan paid off through company cash flow, leaving him on the hook, when he was ready to move on after running EVK for 19 years. The company – a maker of natural salsa, dips, and sauces, with $4 million in revenue – was set to grow 25% a year, simply keeping up with demand. So Bankoff decided to sell to a company that could back growth, like Monterey Pasta Co., with $68 million in revenue.

“Most of the employee benefits package was written into the contract,” Bankoff says. An employee ownership plan was cashed out through the sale, netting employees 15% of the proceeds, plus 5% in profit sharing. Employee ownership will not be continued under Monterey, but profit-sharing will be – if growth and profitability targets are met. He says that many of the benchmarks in the deal are reasonable. Benefits overall can never go below 70% of what employees have now.

With Bankoff still in management, EVKs focus on employee empowerment continues – with monthly meetings, an annual vision retreat, pay for doing personal growth seminars, and compensated volunteer time. Whether this management style will survive his departure is an open question.

Ben & Jerrys contract with Unilever also seemed good, but it seems less so three years later. Unilever stood by most terms, like a commitment to donate $1 million annually to the Ben & Jerrys Foundation. But key issues didnt make it into the contract – like a verbal commitment never to hire a CEO Cohen disapproved of, which Unilever did. “The devil is in the details,” says Mager. “You can have a meeting of the hearts, but what it will eventually come down to is whats in writing. What you dont document you lose.”

In B&Js case, some contract terms cant be monitored – like Unilevers pledge to continue buying non-rBGH (bovine growth hormone) dairy goods from Vermont family farms. “Its been disappointing,” says Joe Sibilia of Meadowbrook Lane Capital. “Provisions in the Unilever contract are legally binding, but we do not have the money to enforce them. We would have to do an audit.”

4. Little-known state laws offer protection to social mission.
When Unilever and Dyers launched the hostile takeover for Ben & Jerrys in 1999, Cohen worked with social investors to form Hot Fudge Partners, which tried to buy the company. They put together a $38 per share offer -nearly double the $17 price of the stock before the battle began. The board was on the verge of accepting that bid, even though it was slightly slower than a $40 per share offer from Unilever.

But then the NY Times published a leaked account of the boards deliberations. Within weeks, three shareholder lawsuits were filed, opposing the Hot Fudge offer because it didnt maximize shareholder return. A flurry of new offers followed. And when Unilever upped its offer to $43.60, the board felt it had to accept.

Ironically, there was a Vermont law that could have helped the board win those lawsuits, had it sold to Hot Fudge Partners. Its even called the Ben & Jerrys Law. And its similar to stakeholder laws in place in 32 states, including Illinois, Massachusetts, Minnesota, New Jersey, and New York. These laws say boards need not sell to the highest bidder, but can take other factors into account – like the well being of employees and the community – in deciding who should own a company.

Why didnt the Ben & Jerrys board use the Ben & Jerrys law? When the idea of using the law came up during the takeover battle, Sibilia says, “I remember exactly what was going on,” he continued. “We paused and went into the other room. And we said to ourselves, if we use this law well lose and have to appeal. It could go to the Supreme Court.” The group couldnt afford to take that on.

“The lawyers told us, youre gonna lose, but its worth the fight,” recalls Terry Mollner, another social investor helping them. The problem was that the law says directors can accept a lower bid for social reasons – but it doesnt say how much lower. The group felt it could win at $38 vs. $40 but not at $38 vs. $43.60.

Until these laws are better established, the legal tradition remains that “shareholders are entitled to an unlimited upside, and thats an immoral contract with society,” says Mollner. “The laws need a test case,” adds Sibilia – by someone with the deep pockets to see it through.

Ben & Jerrys might have been that test case. But instead, its spirit is slowly withering in the grip of Unilever. As Cohen told Mother Jones, “I think that most of what had been the soul of Ben & Jerrys is not gonna be around anymore.”

Perhaps its too much to expect of B&J, that it could have changed the legal landscape of capitalism, in the same way that it changed the landscape of social management. “Youre talking in one generation, one deal, trying to shift the consciousness of capitalism,” says Sibilia.

Ultimately, solving the legacy problem will require a major cultural shift in our mental model of what business is about, says Anita Ryanand companies like Ben & Jerrys have helped to bring that day closer. “Ben & Jerrys is not a loss,” she says. “Whats going to be here in a hundred years because Ben and Jerry did their thing?” She adds with a laugh, “If youre frustrated with how long this change takes, youre being like Wall Street and thinking short-term.”

Judy Wicks of the legendary White Dog Cafe in Philadelphia is similarly philosophical about possible mission loss. She says that perhaps the real legacy founders leave behind is the model of how to run a company differently. She adds with a twinkle in her eye, “Would it be the end of the world if the White Dog didnt last forever?”


Marjorie Kelly is Editor of Business Ethics
Contact her with your legacy stories and models.

Excerpted FROM Business Ethics, a Content Partner.

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