"I’ve long said that our employees have owned Ward Lumber in their hearts for a long time,” CEO Jay Ward said of the company's move to a co-op. “Now there’s ownership in the pocketbook.”
Most news stories from last week about how Ward's co-op works and why Jay Ward did it. The backstory has several lessons you can use even if you never take the same route.
It's the Culmination of a 30-Year Teaching Effort
“Back in 1988-89, I took a P&L out and had a meeting with my managers and asked them the net profit," Jay Ward told me. "The answers weren’t realistic. I then went through the financial statement and show really small numbers go to the bottom line. … If I hadn’t, the perception would have been that we’re taking home half of every dollar.”
Ever since, Jay Ward has continued to practice his philosophy of open-book management a couple of times per year. “I’ll write it all out and everybody’s got a copy,” he said. “Reality is usually a lot slimmer than what folks think. It was just part of my culture.”
That work has paid dividends now. “When we were being assisted, we were told this was an easier transition because it wasn’t totally out of the realm of knowledge,” Jay Ward said.
Why Not Do an ESOP?
Other LBM operations have decided to create Employee Stock Ownership Plans, but Jay Ward believes a Ward Lumber-style co-op is easier, simpler, and less expensive.
“An ESOP requires a valuation of the business every year,” he said. “Valuations can be expensive, and this is typically not a high-margin industry. ESOPs also are highly regulated. Co-ops aren’t gruesome. The big thing is that, with an ESOP, there’s a trustee who makes the big decision. In an employee co-op, the owners make the decision—they vote directly. I really wanted to vest control in this business in the team that runs this business every day.” And to help assure the business runs well, he plans to add even more financial training beyond what he has done for decades.
The Previous Ownership Structure Was Simple
Ward Lumber, a fourth-generation company based in the towns of Jay and Malone in New York’s North Country, has always been a Chapter C corporation. Jay Ward has been the sole owner of that operation since 2017. That’s the same year Jay and brother Jeff Ward spun off the company’s manufacturing division, Ward Pine Mill.
As a result, only one person needed to be involved in deciding whether to hand over ownership to a co-op.
All Employee Owners Are Equal, But ...
The co-op structure permits Ward Lumber's 40 workers to buy one share each; they cost $1,000 apiece for full-time and salaried employees, and you can buy that share on the installment plan. A part-timer working up to 1,000 hours per year can buy a half share.
The workers makes up the entire shareholder community eligible to vote on major issues. Up to seven employees and two outsiders (neither of whom will have shares) will sit on a board of directors, and Jay Ward will remain as CEO and as the person who makes day-to-day decisions. Salaries will continue to vary by employee, and pay raises will still be decided by managers.
The shareholders’ money is held in what is referred to as a “capital account.” Profits will be distributed into this account and shared equally. At retirement, the employee owner presumably will have a capital account that has grown in wealth. The employee can request a payout from that account, and the board will decide on a payout schedule that typically will last several years.
Outside Funding and Advice Made a Big Difference
As you would imagine, Ward Lumber is worth far more than the $40,000 represented by those shares. In fact, aside from a grant from New York State, most of the money paid to Jay Ward came from the Co-Op Fund of New England, and so the company’s books now include a debt to the Fund that it will pay just as if it had gotten a bank loan. Notably, the co-op owners are not required to make personal guarantees for repaying the Co-Op Fund’s money.
Jay Ward said he has been thinking about an employee ownership structure for 25 years, but was told it was too complicated and expensive. “I found information about co-ops through the North Country Association,” he said. “Ultimately, I found the Cooperative Development Institute. CDI and the Co-Operative Fund of New England were really core to this. CDI’s Rob Brown handles the business ownership solution part of this. They know the process. When I met Rob, this idea that sounded exciting, but I don’t know how to do this became more tangible. The expertise exists and the lender exists.”
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