Twenty years ago, my family had a problem.
We were the sole and devoted owners of a successful stand-alone daily newspaper in Monroe, Michigan. But our principle shareholders – my father and his brother and sister – were advancing in years and had no solution in place to transfer ownership to my generation.
It seemed we had two options. We could keep going until one of the three died, which would force a distressed sale. Or we could move immediately toward sale, but take our time in finding a buyer who would continue our tradition of good journalism and service to the community.
Months passed without a decision. Then, almost by chance, I happened upon a book about employee stock ownership programmes, or ESOPs. As I read, it began to seem that this might be the perfect solution for our family.
The ESOP concept (for more, see here and here) was hatched in the 1950s and was recognised in U.S. law in the 1970s. It was designed as a way to enable and encourage company owners to share ownership with their employees.
ESOPs are authorised and governed by federal ERISA (Employee Retirement Income Security Act) and tax-code regulations. The regulations are complex and the creation of an ESOP takes time and involves significant legal costs, but the benefits are substantial.
In our situation, the ESOP solution seemed ideal. We had no desire to transfer our beloved company to a third party. Through an ESOP, our family could transfer ownership to the people we worked with every day, who shared our commitment to the community, good journalism, and good business.
And, thanks to the incentives built into the U.S. tax code, we could do this with no sacrifice to the selling members of the Gray family, and at no cost to the employees.
With the family’s blessing, I began attending ESOP conferences and exploring the mechanics of creating an ESOP to suit our situation. The board approved going forward, and we began to structure the transaction, the necessary loan, and the ESOP’s enabling documents.
In our case, what made sense was a 401(k) ESOP in which the employees’ retirement accounts would, over time, receive the Monroe Publishing Company shares purchased from the Gray family.
Trying to keep it simple, here’s how it worked:
- The company borrowed several million dollars in a long-term loan.
- The company lent the money to our newly created ESOP Trust.
- With an independent appraisal to set value, the Trust purchased shares from the Gray family.
- From then on, profits from the company would go into the ESOP Trust and would be used to make the payments on the loan.
- As the loan payments were made, shares would be allocated from the Trust’s general account into employees’ individual accounts.
- Gradually, in proportion to their 401(k) deferrals, they would become owners of the newspaper company over the life of the loans.
In the first transaction, the ESOP purchased 58% of the shares. Five years later, with a second round of borrowing, the ESOP bought the rest of the shares. So, in 1999, the Monroe Publishing Co. became 100% employee-owned.
That describes the mechanics, but the change in the company was far greater than that.
As employees became shareholders, we moved the company to open-book management. We shared full financials with the employees – at first quarterly, then monthly. We believed that employee shareholders who understood how the company made money would become more effective as employees. They did: Productivity and profitability improved.
Just as importantly, full disclosure became a foundation of the company’s culture. We created ways for employees to participate in more of the company’s decisions. Our internal education and communication programmes taught employees the fundamentals of the business and earned us awards from the ESOP Association.
We also opened additional seats on the board of directors to employees. Ultimately, we wound up with four internal directors and five external directors.
Three years after the creation of the ESOP, with a long-term solution in place, I accepted a job as managing publisher of The Christian Science Monitor and moved my family to Boston. Lonnie Peppler, (now Peppler-Moyer) our vice president of sales, became publisher.
I remained and still remain on the board of directors, serving as chairman since my father’s death in 2007.
The Monroe Publishing Co. was an ESOP success story. Under Lonnie’s leadership, the company prospered, the ESOP worked beautifully, and employees saw their retirement accounts grow handsomely. Share prices – determined annually by an independent appraisal – ticked upward nicely. In 2007, the ESOP Association named us the ESOP Company of the Year.
But with the advent of the Great Recession, the whole newspaper industry’s fortunes changed — ours along with it.
At the Monroe Publishing Co., as elsewhere, revenues and profits declined most years. Pay cuts became unavoidable. Staff cuts were frequent. We outsourced printing and took every step we could see to create new solutions and products to produce new revenue streams.
Along with the industry, we rode downward, struggling to maintain cash flow and find strategic and operational solutions to stop the decline. The company’s share prices fell most years.
On the board of directors, we oversaw all of this with great consternation. Each year, in our October strategic planning meeting, we would take stock of the situation again and look for alternative strategies to replace revenue.
We were ever mindful of the fact that our declining share prices meant that our employees and retirees, for whom MPC stock was the bulk of their retirement accounts, were losing ground.
The question always loomed: Should we consider selling the company?
During the worst of the recession, when sale would have been unthinkable, we did our best to deploy new strategies to offset the annual declines in revenue and cash flow. We hoped we could figure it out and restore at least stability to share values, if not growth.
Among other things, we started a digital (and non-digital) advertising agency. We tried to double down on digital advertising sales. We acquired a digital printing company.
By fall of 2014, however, it was clear that all of these efforts were not making enough difference. I polled the board in individual interviews, asking each director his or her view of the sustainability of the company and of our ability to halt the declines in share value.
The picture that emerged was clear. A company our size – and getting smaller every year – simply didn’t have the scale to generate the new revenues needed to stop the decline. We believed our employee and retiree shareholders were likely to keep losing share value for the foreseeable future.
That was simply unacceptable. The decision we needed to make was painful but obvious.
In the fall, the board approved exploring a sale. We engaged Dirks, Van Essen, and Murray to represent us and pushed ahead. When the bids were received, our decision to sell was unanimous.
But an ESOP company must pass the vote through to the shareholders. (Oddly, U.S. law provides an exemption for newspaper companies, but our board chose not to exercise it.)
So the board took the case to the ESOP participants. As chairman, I explained our reasons for recommending the sale, both in writing and in a well-attended shareholder meeting.
When the votes came in, 99.7% of the shares were voted in favour the sale.
For me, this is a bittersweet end to a 20-year story. But it is also clearly the best possible outcome for our shareholders, given the circumstances faced by the newspaper industry. It’s also possible that it may also give the local newspaper a longer life, through the scale advantages of a larger organisation.
My family certainly never anticipated this outcome. But in the end, we achieved what we set out to do. Although it took 20 years, we succeeded in transferring full ownership of the Monroe Publishing Co. into the retirement accounts of our employees.
And now they are free to invest that value in industries that can grow.