How to protect a great democratic company from destruction

WorldBlu’s list of the 10 principles that come together to make a democratic workplace is one of the pages I link to the most from this blog. It served as a guide in making my previous company more democratic and it’s a very easy way to explain what organisational democracy actually means. However, I believe that there is something incredibly important missing. Not an 11th principle, but a wrapper for the full set of existing principles.

This wrapper is constitution. It means that the other 10 principles are protected and enduring. Like a democratic nation state, a truly democratic organisation will be one forever.

This isn’t just an academic point. We already know that buy-in from senior leadership is key to building a democratic company. So what happens if a democratic company is sold to new owners and the founders who built the democracy eventually leave? Take Zappos for example which was started by (a business hero of mine and awesome dude) Tony Hsieh. Clearly Tony has been a driving force for their culture of happy employees who create happy customers, and how they use democracy to help them achieve that. It’s worked spectacularly well, so much so that bought them for close to $1BN.

Of course, when the company was sold all parties said the right things: Amazon wouldn’t want to change Zappos because their way of doing things works. Tony said he had no immediate plans to leave, that they are as committed as ever to doing things the Zappos way, and even hopes that the culture rubs off on Amazon a little. So far so good. But things can and do change.

I want to be clear that I have heard nothing to date about Zappos heading off-track. It’s the future I worry about. Tony Hsieh will not be there forever. Management at Amazon will change over time. New competitors may disrupt their business and put enormous pressure on them in the same way that Amazon and Zappos disrupted the retail industry. Who knows what the future looks like? As a democratic (and brilliant) company, Zappos is far better placed than most to be resilient through tough times. But the company is only ultimately accountable to one master: Amazon’s shareholders. They, not the employees hold the ultimate power.

Shareholders of public companies like Amazon – mostly hedge funds and pension funds – buy-in to a company culture only when it supports their goal of financial value creation. The big tension is that a democratic workplace is a long-term game. But the stock market in comparison is too often driven by next quarter’s results, and it’s easy for investors to jump ship at a moment’s notice if the share price is going in the wrong direction. They don’t have to be invested for the long-term. In tough times, or simply with enough short-termist shareholder pressure, changes can be made to drive profit now at the expense of democracy and financial performance in the future.

We’ve seen what can happen when a great company ‘sells out’ in both senses of the expression. When hyper-ethical clothing brand Howies was bought by Timberland, the founders were told at the time: ‘Keep doing things your way. Become even more Howies.’ Exactly what Amazon told Zappos. Howies now had the cash of a larger parent to drive the business forward and a green light to stay true to themselves. All good. Until it went wrong. Founder David Hieatt later wrote:

A year or so after selling to the ‘current owners’ I was in a meeting in Boulder, Colorado. I was told that I had to move ‘this bit’ of the business to this country and ‘this bit’ of the business to this country, or they would ‘spin us off’. I had to ask what ‘spin you off’ meant. (It means to sell you.) Those kind of meetings are called ‘Dream Breakers’ for good reason. I emotionally left the company at that meeting.

Eventually he left the company for real. Apparently selling out really did mean selling out. Timberland was later bought out by investment group VF so Howies changed hands again. Since they’d already ‘sold out’ there was nothing they could do about this. And now the latest news is that the Howies management put in place by Timberland have bought out the firm to take it back into private hands. What a huge waste of time, effort and emotion. And the employees – you know, those people who actually do all of the work and generate 100% of the value – were merely powerless pawns in the whole story.

The enormously successful, democratic company SAIC with revenues in the billions of dollars was owned by its employees and enormously profitable. In employee ownership, its share price had doubled every five years. But its achilles heel was a lack of a constitution that protected its ownership. Under a new CEO, the employees were persuaded to take the company public. Once it did so, growth tailed off, and employees came to deeply regret the decision. Current and future generations of employees lost ownership of their company forever.

Just because Howies and SAIC ‘went bad’ that doesn’t mean the same will happen to Zappos. But the point is that Zappos is a wholly owned subsidiary of Amazon, so the employees have no rights to prevent dramatic changes to their workplace or the destruction of the democracy that they enjoy there. While things are going well I’m sure they’ll be left alone, but if in the future Amazon feel like the interests of the shareholders (which may be short-term) point to a change of direction, then make no mistake – it will happen. Remember, shareholders are the only people who have the power to remove and appoint the board of directors.

I feel like I’ve picked on Zappos in this post. Sorry Tony! It’s not really about them – they are just one example of a fantastic democratic company that has the potential to go bad. I hope it never happens. The point is that truly democratic companies need to have their principles enshrined in a constitution that cannot be easily overturned by new masters, especially those seeking to generate short-term results over long-term value creation and the wellbeing of the employees.

There are a number of ways that a constitution can be made real. For example, you can do something similar to B Corporations who have clauses in their Articles of Association stating that the primary purpose of the company is to deliver social or environmental benefit and not just make money. The online social network Couchsurfing became a B Corp before taking venture capital to protect its higher purpose.

However the most powerful way of protecting a business against short-term-driven new masters with the potential to wreck a democracy is to remove the possibility of having new masters entirely. This is done by making the business employee-owned. It doesn’t mean that entrepreneurs like Tony Hsieh have to give away their baby. The company can raise finance to buy out the founders and the shares are held in a trust for the employees using a mechanism similar to a leveraged buy-out. Or the founders can simply be paid off over time out of future profits. When it becomes employee-owned, a constitution is drawn up that protects the shares, and therefore the ultimate power of the employees, forever.

The UK retailer John Lewis is one of the most successful democratic, employee-owned companies in the world. When John Spedan Lewis sold the company to its employees he had the foresight to create a solid constitution. Not only does this protect ownership of the business for future generations of employees, it also sets out how the directors are accountable to the employees as well as other principles such as an internal ‘free press’ (the company newsletter is obliged to print all letters from employees with a response from a director.) The company cannot be taken public, protecting its successful model, and the rights of employees now and for all future generations.

Employee ownership is the only sure-fire way that selling out doesn’t lead to a sell-out of the rest of an organisation’s principles further down the line, and that founders can leave a legacy to be proud of. I hope that more founders will choose this route.

48 thoughts on “How to protect a great democratic company from destruction

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