Can Private Equity Be … Nice?

When the private equity firm KKR agreed to buy the publishing house Simon & Schuster from Paramount for $1.62 billion on Aug. 7, one element of the deal raised eyebrows in the book world. “Employees will receive an ownership stake in the company, part of a program KKR developed to improve engagement among those who work in the companies it buys,” the New York Times reported. In the wider media industry, which has learned the hard way in recent years what private equity takeovers can mean for headcounts and working conditions, the asterisk prompted skepticism and hope in equal measure. Because I am writing a book (for HarperCollins) about workers at companies acquired by private equity firms, my texts and DMs began to fill with inquiries from curious authors, editors, and gossip hounds. “Am I going to get rich?????” one S&S editor friend texted, concluding with a string of money-tongue emojis.

If Pete Stavros, KKR’s co-head of global private equity, has his way, she just might—rich by the woeful standards of the publishing industry, anyway. For a little over a decade, Stavros has been building employee-ownership stakes into KKR deals; in 2021, he expanded his efforts into a nonprofit called Ownership Works, which has convinced about two dozen other investment firms to do the same. (The Omidyar Network, which awarded me a grant for my book reporting and has funded a slew of groups working toward regulation and increased accountability in the private equity industry, has also given money to Ownership Works.)

The idea is that an acquiring investment firm redirects a couple percent of the total equity of a company to employees; each gets a fraction of the fraction for free, with an option for higher-paid workers to buy more. When the company eventually goes public or sells, everyone gets a check, instead of just the top executives. In the most extreme example to date, workers at Illinois-based C.H.I. Overhead Doors made an average of $175,000 when KKR sold the company for a 10-times return last year. Some longtime truck drivers made as much as $800,000.

Private equity’s entire M.O. is maximizing profits: A firm like KKR buys a company using mostly borrowed money, takes hefty management fees, and often uses a variety of financial maneuvers that progressive politicians and advocacy groups are clamoring to outlaw. (The industry doesn’t have much to worry about on the regulation front thanks in large part to its massive donations to politicians of both parties.) Seen through that lens, Ownership Works can look like simple whitewashing, sacrificing a tiny amount of money in exchange for a lot of good headlines.

Stavros, though, insists that the program is a win-win: Workers get the chance for a big payout and a voice in company decisions, and investors get increased staff engagement and retention, which in turn creates higher profits. He’s fond of recounting a conversation he had while shadowing a C.H.I. truck driver on his delivery jobs through the upper Midwest. The driver told Stavros he was paid 40 cents per mile, so he didn’t care whether his route was efficient—until he became a partial owner of the company, when he had an incentive to help curb waste and drive up profits. While Simon & Schuster is unlikely to see a 10-times exit—it’s still book publishing—Stavros says if workers there can help find similar inefficiencies that help KKR sell their employer for a profit, their small stakes will earn them at least six months’ worth of salary on the deal.

At KKR’s New York headquarters last week, Stavros and I discussed the future of employee ownership and the limitations of the Ownership Works model. The conversation has been condensed and lightly edited for length and clarity.

Megan Greenwell: What did KKR see in Simon & Schuster?

Pet Stavros: We’ve had a lot of success in carve-outs, where you buy a division of a huge company, particularly when that division is not core to what the main company does. It’s usually underinvested in, to say it mildly: underappreciated, hasn’t gotten a lot of focus, and certainly hasn’t gotten capital. Those tend to be really interesting investments. So we took it out of Paramount, which does not have a focus on book publishing, and are now creating the only major stand-alone book publisher. Everyone else is buried in huge conglomerates.

When you’re stuck in a big company that doesn’t have a focus on your business, it leads to a lot of complacency. Why are we going to go kill ourselves to make the business different or better? For example, there’s a lot of waste that comes from excess inventory in publishing. To be fair to them, it’s challenging to predict if a book is going to sell.

I’m sure you know the brand Zara. The entire success of Zara is their supply chain.
Zara basically said, “We’re going to massively shrink lead times. We are going to more locally source everything that we do, and we are going to have the most responsive supply chain in the world. We will test at the beginning of a season, colors, fits, and we’ll see what sells. And then we’re going to shift our whole supply chain to what’s selling.” That’s how Zara made gazillions of dollars. No one has ever tried that type of thinking in book publishing, and there’s no reason those types of ideas can’t work, right? It’s just, what’s the incentive?

There’s always going to be nervousness in creative fields when a company focused on maximizing shareholder value comes in. Every book is sort of a gamble, and you don’t know what will sell and what won’t, but you know that Taylor Swift’s hypothetical memoir will sell a lot better than a beautiful lyrical book of poetry, right?

Book publishing is a hit-driven business, and people don’t really know what’s going to sell. I don’t think it’s practically achievable to say all we’re going to do now is hits, because everyone wants to do that, and no one knows how to do it. I think the key to being successful is going to be making it so the best editors and the best writers want to work with Simon & Schuster. And that needs to be a balance of “We’re bringing important works to the world” and “We’re trying to be a profitable, growing business.”

Tell me the details of how employee ownership will work at Simon & Schuster.

The idea is going to be that everyone becomes an owner in the business, and then we build on top of that. This is very hard and takes years, and, by the way, is not always successful, but we try to build a culture of ownership. That means educating people on the business, teaching them about the financials of the company, sharing information, having quarterly owner meetings. I will chair a steering committee with Jonathan [Karp, Simon & Schuster’s CEO] on employee ownership and engagement. It’s basically a lot of things that we try and do to get people to be more engaged on the job, and then measuring the quit rate. So, are people less likely to quit over time?

What about the financial side for employees?

We try to underpromise and overdeliver. So we will say to folks, “If we hit our plan,”—I don’t even know what the plan is yet, reduce waste, whatever—“everyone has an opportunity to make six months of their salary in stock options.” We’re hoping that it will take 24 months. And when I say “the plan,” it’s not just earnings, but key drivers of growth. How can we get the entirety of the workforce to understand the drivers and be involved in pushing them forward, give them data to understand how we’re doing and how they’re contributing and where we’re off track?

If you make less than $100,000, you still get equity, but we don’t ask you to invest. That’s an Ownership Works mandate. If you’re making more than $100,000, you don’t have to invest; you will have a little bit less upside, you’re going to get a little bit less stock, but you can always go in the free lane. And then in the nonfree lane, it’s small as a percentage of your income. So it tends to be something like 2 percent of your annual salary. And the goal is that within a couple of years, everyone can get at least 100 percent of their salary out.

Simon & Schuster’s entry-level salary is now $50,000, which is the highest among the Big Five publishers. But—

It’s low.

It’s barely making ends meet. So if I’m an entry-level worker at Simon & Schuster, why don’t you just raise my salary? 

It’s one of the most complicated and fair challenges you always get with this program. Simon & Schuster, without getting into numbers, is not a highly profitable business. And we are managers of other people’s money. So to give you an extreme example, we [KKR] manage teachers’ retirement funds. We also manage wealthy people’s money, so I don’t want to cherry-pick, but I’m just giving you a flavor for why this is so tricky. If you’re managing teachers’ pension money and you want to just raise everyone’s salary, that is on the backs of teachers, which is not ethical, and it’s not our money. So what can we do? Ownership is a way of trying to navigate to a win-win: People can build wealth, quit rates can go down, company cultures can improve, productivity can go up, performance can improve, and the teachers are better off, just like the workers.

This does not solve everything. It’s not like if we just do employee ownership, the economy is going to be fair and everyone’s going to be fine. I totally acknowledge there are other challenges. We just don’t maybe have the tools at all times to address them. This is where CEOs need to understand this is a messy process you’re about to embark on. Workers will say, “I am shocked to hear this company makes $100 million in annual profit. My hourly wage is $22. This is unethical.” So when you start this journey, you have to be prepared for some very honest, not-so-easy conversations.

If we’re successful, we can do more for you in terms of impacting your life and your financial future than we could ever do by giving you another $1 an hour or $2 an hour. It doesn’t always go as well as it did at C.H.I., but there, people made hundreds of thousands of dollars, which we could have never matched through wages.

What happens if in a few years the research shows that C.H.I was an exception, and in general this isn’t paying off for investors in the way we hoped it would?

That would be bad. I’m highly, highly, highly confident that’s not going to happen.

The way we look at it is, any private equity firm sets aside an incentive plan. In general, that incentive plan would be for about 10 to 15 percent of the upside. That would historically go to just senior people. So what we do is, we give a smidgen less to senior people on a percentage basis, and then we make the plan a smidgen bigger. And the combination of those two leads to an opening up of an opportunity to bring everyone into the ownership program. You’re looking at two impacts. Can I still afford to hire the best and brightest at the top? We’ve had no problem doing that. And can I afford to show all workers enough of an opportunity without making the overall plan so big and diluted? And the math shows that you’re not risking that much.

So the senior executives’ share of the pie is getting a little bit diluted, KKR’s share is getting a little bit diluted, the outside investor share is getting a little bit diluted, but it’s a trivial sacrifice for everyone.

Yes. And when you drop the quit rate 90 percent and you are no longer hiring thousands of people every year, you eliminate the cost of recruiting, training, and retraining, all the knowledge and skills you’re losing as people are just walking out the door every year. You don’t have to believe in a miracle to say, “I can cover those costs because I’m going to have a happier, more engaged workforce.”

A publishing company is reliant on human capital in a way that maybe manufacturing isn’t. I’ve worked in journalism long enough to know finding efficiencies in industries like that often means restructuring, and that often can mean layoffs. And an employee owner isn’t going to get that big payoff if they get laid off.

We would not invest in a company where the strategy is to get profit dollars up by firing people. We just wouldn’t do that.

Then you’re talking about—and this isn’t going to happen in publishing, I don’t think—but in a more cyclical industry, the industry falls to pieces because the economy falls to pieces. Or another example would be a merger; if Simon & Schuster merged with a smaller company, there would be redundancies. Jonathan Karp would have to make some tough decisions, but how are people treated in those scenarios? How much notice, how much severance do they get? Running a company doesn’t mean that you’re not operating in free markets and things can’t happen. But we’re not buying into an investment thesis where we’re just going to go fire people to reduce costs.

But there are always divisions that are underperforming, right? There may well be an imprint within Simon & Schuster that is not pulling its weight financially. Balancing things in order to maximize profits can often mean, “Well, this thing just isn’t working.”

Yeah. That feels less controversial to me. If there’s a money-losing imprint, the board would say, “Well, how are we going to make this work?” But there is a view among some people that it’s like the slash-and-burn, pump-and-dump strategy. We wouldn’t do it, first of all; second of all, I’m not sure those opportunities really exist.

You talk a lot about how employee ownership is not just about the financial side, it’s also about having a seat at the table. But realistically, they’re tiny minority shareholders. So how does this help them get a seat at the table any more than they would through a union or a normal employee council, which a lot of companies have?

It’s not like we don’t do employee ownership with union companies. To me, it’s about integrating ownership with information and transparency, with having people’s ideas and voices heard. That’s one question we sometimes get: “Why don’t you just do everything except the ownership? Why can’t you just do worker voice and financial literacy?” I think it’s the right thing to do. But also, I think the combination of a financial stake and a seat at the table is the magic of what makes the program work.

But do you feel like the voice they get at the table is meaningful?

It varies. It has to do with how far the leadership team is going to go with the program. There are some CEOs who roll out the ownership program with good intentions, and then they have the quarterly owner meetings, but not that much changes beyond that. People have a better understanding of where the business is headed. The engagement scores, you know, go up a little bit or kind of go sideways, the quit rate goes up a little bit or goes sideways.

And then there are CEOs who do what I think Jonathan will do, kind of go whole-hog on this. But to your question of how meaningful is the voice, I think it’s inconsistent, and we are at the mercy of the leadership team because they have to do this every day. It’s not like I can show up once a month for a steering committee meeting and make something magical happen.

One flaw in the model seems to be that private equity ownership is generally relatively short-term. C.H.I. sold last year. The workers there got their payout, but they’re no longer owners of their company.

There are three ways we exit companies. We take them public. That is in many ways the easiest situation because you are permanentizing the capital structure. So, forever, that will have employee ownership as a component.

The next easiest would be when you’re selling to another investor, because they would be crazy to blow up the program. If you’ve done years of hard work, changed the culture, and people expect this now, for someone to say, “We are kind of just like KKR, but we’re not doing that,” would be very difficult.

The hardest one is when you sell to a corporate buyer. But I don’t think it’s a coincidence that C.H.I sold to Nucor, because they are legendary for how they treat blue-collar workers. They have the best safety record in the world. They have a profit-sharing program, which is massive. I don’t think it’s a coincidence that groups like that migrate to cultures like this. It’s not perfect. [C.H.I. workers are] not owners anymore. But I think these businesses tend to end up in homes that fit.

You’re likely not going to get a 10-times return out of Simon & Schuster. What’s the best-case scenario for employee owners there, and what’s the path to getting there?

I think the best scenario is that we see meaningful moves in employee engagement scores and the quit rate. I think people would agree, if those two metrics move meaningfully, it’s irrefutable that the culture has improved. The other part, from an employee perspective, is that they generate meaningful wealth for themselves, and it’s great for our investors. That’s the home run you’re always trying to hit: People are happier, they participate in the value creation, and investors did great. That doesn’t have to be a blowout deal. It can be a good deal and people can make a lot of money.