Speaker 1 (00:03):
From the library of the New York Stock Exchange at the corner of Wall and Broad streets in New York city, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism. Right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King (00:46):
We've talked about private equity on the show before. Steve Schwartzman of Blackstone was our guest back on episode 130, David Rubenstein, Carlisle's co-founder was with us on episode 31, and last year was another good year for private equity. In 2021 firms in the space raised nearly three quarters of a trillion dollars in capital for their various investments. That amount set an all time record, despite a decrease in the number of funds across the sector, more capital, fewer funds, have allowed the long time power brokers who've been stalwarts in the space to continue to grow, but this isn't the environment of our father's generation of leverage buyout firms.
Along with the rest of the markets, many of those in PE have evolved to embrace technology, ESG and a holistic view of doing business. This might be best captured in the title of Forbes magazine's 30 year retrospective on Bryan Burrough and John Helyar's sector defining page-turner from 1989, Barbarians at the Gate, an article written much more recently recasts KKR or Kohlberg Kravis Roberts, as it's more formally known, as the Gentleman at the Gate and showcases the firm's focus on ESG, helping portfolio companies and putting stock into the hands of employees from the top, all the way down to the hourly workforce.
The article cited one deal in particular, the merger between Gardner Denver and Ingersoll Rand as emblematic of the modern PE deal. Joining us today is one of the gentlemen quoted in that article. KKRs Pete Stavros. At the time, Pete was head of the industrial sector team behind the Gardner Denver deal that returned billions to KKR minus about 150 million that went to the workers of the combined Ingersoll Rand, which is ticker symbol IR. I'm certainly familiar with KKR's workings having been inside two firms that were trophy turnaround projects for the last 20 years. Willis Group Holdings, then known by the NYSE ticker symbol, WSH led by my old friend, Joe Plumeri, and First Data Corporation, which had the ticker symbol FDC successfully brought public once again by CEO Frank Bisignano.
So our conversation with Pete Stavros on creating a culture of ownership, why he started Ownership Works and how KKRs America's fund is changing the economics of private equity. It's all coming up right after this.
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Connecting the opportunity is just part of the hustle.
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Opportunity is using data to create a competitive advantage.
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It's raising capital to help companies change the world.
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Opportunity is making the dream of home ownership a reality.
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Writing new rules and redefining the game.
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And driving the world forward to a greener energy future.
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Opportunity is setting a goal.
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Sometimes the only thing standing between you and opportunity is someone who can make a connection.
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At ICE, we connect people to opportunity.
Josh King (04:28):
Our guest today Pete Stavros is co-head of America's private equity platform for Kohlberg Kravis Robertson company, which of course trades under the ticker symbol KKR on the New York Stock Exchange. As the leader of KKRs industrials team, he pioneered the innovative employee engagement and ownership model that we'll be discussing today. Prior to joining KKR, Pete was an investor with GTCR, Golder Rauner. Welcome Pete Inside the ICE House.
Pete Stavros (04:56):
Thanks for having me, Josh.
Josh King (04:58):
Speaking of generational changes, you often cite your dad's influence on how you look at employee ownership, Pete. Can you talk to us about your dad who belonged to union and worked as a road grader in Chicago? Was it at all like the role that Carl Fox played in Wall Street by Martin Sheen as a mentor to Charlie Sheen's young Bud Fox?
Pete Stavros (05:19):
Yeah. So my dad, as you said, operated a road grader for 40 plus years in Chicago, a member of a local union, and two things drove my dad. One drove him crazy and one, he just regretted. The part he regretted was it was hard to build wealth, making $15 an hour. The part that drove him crazy was the lack of incentive alignment. So this idea that the workers always want more hours, they want overtime hours, as long as it's scheduled in a fair way. And the employer wants just the opposite. So my dad used to talk about the need to work steady not too fast, not too slow. If you work too fast, your hours go down, your pay goes down, you work too slow, you get in trouble. And he never really felt any incentive for cost, quality, on time delivery, customer satisfaction, all the stuff that he thought an employee should care about.
And so, yeah, his dream was profit sharing, not necessarily ownership, but having some stake in the outcome, some reason and way to be aligned with his employer. It never happened in his union, but all the dinner table discussions about that lack of alignment and all of the weird incentives that exist when you're exclusively paid by the hour, that definitely left a big impression on me.
Josh King (06:39):
So what's a young Pete Stavros thinking around that dinner table?
Pete Stavros (06:43):
I was just absorbing it all. But there were a lot of incidents that left of real mark on me and I'll never forget. One example was, there was always this fight over hours. Would my dad get paid for the hour it took to drive to the job site. Would he get paid for the hour, drive home? Would he get paid for the lunch hour? And over time, the union lost a bunch of those hours. So the company won and hours went down. My dad's paycheck went down. And so one time he came home early, we were all like, "What happened? Why are you home? So early?" He said, "Oh, the job ran out of material." But it's a better story than that because they intentionally ran the job out of material.
When they took away the paid lunch hour, what they did was they coordinated with the road aggregate supplier, which was also union. And they agreed to have the road aggregate the key raw material delivered right at lunchtime so that my father and his colleagues could intentionally refuse delivery and run the job out of material to get the attention of the management, to say, "This has reached a point where we just can't live. So we're going to have to figure out a way to do this differently."
Josh King (08:00):
So workers and management are sabotaging one another. Does the commitment needed to launch an ownership program help rebuild trust between company and employee that's been worn down over generations?
Pete Stavros (08:15):
Yeah. And by the way, according to Gallup, who's the leader in employee engagement surveys, and really invented this as a discipline, every company has about 15 to 20% of employees that they characterize as actively disengaged. So literally trying to sabotage the employer, which is something really to think about.
Yes, I think ownership is that first step. It's a sign of trust, we trust you enough to bring you into the ownership, we're going to be sharing a lot of information, financial information with you. And then the second thing is it's a sign of respect. We respect you enough. You matter enough to be brought into the ownership. So it is a first step. There's lots more that needs to be done. But I think the word you chose is an important one.
There is a lack of trust, oftentimes today, between that hourly workforce and the management and ownership of the company, and there's lots of little things you can do along the way to build trust. For example, these engagement surveys, when you get the results, we really like our CEOs to go share the results transparently with the organization and then commit themselves to change. So got the results, did the Pareto analysis. Here are the big three issues, you're going to see movement in 90 days, and then you're going to see big movement in 12 months. And when people see their voices heard, not only heard, but acted upon and then the CEO is keeping their word, that does start to build trust.
Josh King (09:41):
The elder Stavros didn't have a background in labor relations. I don't think he had a business degree or maybe even a college degree, but he did seem to have this expert grasped on this relationship. Was self-improvement and education. Something that he encouraged inside the Stavros household around the dinner table?
Pete Stavros (09:59):
It was a little bit more my mom. Neither of my folks went to college, but my mom was very focused at an early age on education is the path, hopefully end up in a better work environment than what your father had.
Josh King (10:13):
So education was the path that your mom set you on a path down to Durham, North Carolina, to study chemistry at Duke, not a typical undergraduate degree that you would bring to KKR. What was your career plan at the time and how did your career lead you to studying employee stock plans when you got to HBS?
Pete Stavros (10:33):
So I actually thought I wanted to be a chemist. I don't know why, other than I just really liked the material. And I took organic chemistry and loved it. And my organic chemistry professor pulled me aside and said, "This is something you're pretty good at. I'd encourage you to, Oxford University had this thing called the visiting student program, which was a lot more than study abroad. It was basically, you go spend a year and you're fully committed as a part of the school of the university for 12 months. I was in the lab for, oh gosh, 30 hours a week. And I didn't love it. I still liked the content, but being in the lab that much was a little bit too much.
So coming out of school, coming out of Duke, I only got one job, which was, I really wanted to work at McKinsey, or Bain, or BCG, but didn't get a job there. I got a job at Salomon Brothers in their M&A group. And a couple of years into it, the gentleman who ran the mergers and acquisitions group had me interview with some of his friends who ran a small private equity firm. And I interviewed, got a job, and then the first thing they had me work on, and this gets to the employee ownership side of things was a funds flow related to the closing of a sale to a company called Clark-Schwebel. And this was back in the days when wire transfers were really all done manually and verbally. And we're going back in this direction because of all the fraud with wire transfers today. But I spent, basically two straight days phoning in wires to individuals who were shareholders in this company that was being sold. There were maybe 60 shareholders if I recall correctly.
And what struck me was when you were confirming the wire with the CEO, the CEO who is perfectly pleasant, but was not very moved by X million dollars showing up in his count. It was like, "Yep. Confirmed, got it. Click." But when you got down to the 60th person who was the assistant controller, they were moved to tears. Because this would mean college education for their children and some financial security. So that was very impactful. And then the second thing they had me work on was in ESOP. These aren't as common at scale anymore, but this was a very big thing in the 70s and 80s for companies at scale, converting to companies where the entirety of the common equity was owned by the employees.
So this was a partial ESOP a company called Gleason Corporation, made the machines that made bevel gears for automobiles. And that was really fascinating. We had executive assistance with million dollar accounts. And that was probably the second thing that really grabbed me. And then when I went to business school, I had an opportunity to study in my second year, whatever interested me, and I went super deep in this topic of ESOPs. And I wrote a paper that got published with a professor at Harvard. That was 22 years ago. And then there were a couple of other things along the way that really steered me in this direction. And then I got into a leadership position at KKR and had an opportunity to experiment with non-ESOP ways of sharing ownership broadly.
Josh King (13:38):
So the executive producer of my show Pete Asch on the phone with us now does a lot of work on all of our episodes and our guests. But he is also the chief archivist of the New York Stock Exchange. So he went deep just like you did into the NYSE archives and saw that the listing applications included way back in the 18 hundreds, additional issuances for employee stock plans. What's the history just for our listeners of employee stock plans? And how did ERISA both complicate and modernize them?
Pete Stavros (14:10):
You can go back in time and you can find from the early 1900s, the CEO of General Electric talking about the need for employee ownership. You can go back many decades, over a hundred years and you can find people talking about this to your point. So it's not a new idea. One of the most eventful periods in employee ownership was the one you just referred to in 1974, the ERISA Act, established ESOPs as a tax structure that allows for two major tax benefits. One a selling shareholder into an ESOP can defer and potentially avoid forever paying capital gains on their sale of a company, into an ESOP, meaning selling it to the employees. And then the second thing is a hundred percent ESOP pays no income taxes.
And so there was this big tax incentive created for distribution of stock to employees, and this really took off. You went from basically nothing to maybe 10 million employee owners under this ERISA plan that established ESOPs. Anything that puts ownership in the hands of workers I'm in favor of. There are some challenges that have developed over the years, not to go through all of them, but you have to have an ESOP trustee on the board. There are not as many ESOP trustees out there as there once were, and you have to provide mandatory redemption rights to people as they retire, you have to help them diversify when they hit age 50, the Department of Labor oversees these plans not the SCC, which has created some consternation has been a number of lawsuits between the DOL and companies and maybe last and most importantly, as valuations have crept up over decades, I shouldn't say crept up, have leaped forward over decades, it's become harder for employees to really be competitive in buying their businesses.
So back in the 70s, when businesses were trading for a slight premium to networking capital or five or six times EBITDA, you could borrow most of it and you need a little sliver to come from the employees so they can be competitive, today, any halfway decent business trades for 14 times EBITDA and the leverage is still at six or seven, and it's really hard for the employees to fill up that gap even with outside structured security. So those are some of the challenges that have popped up.
Josh King (16:32):
Before we get into the details of how you began embedding employee ownership into KKR specific deals, can you give our listeners basically a quick thesis on what you think a culture of ownership would do for a company?
Pete Stavros (16:47):
So a culture of ownership comes with rights and responsibilities on both sides, the company and the employee. And it really has to do with employees thinking and acting like an owner and being in receipt of ownership so they could participate in the upside. So a culture of ownership really is what it sounds, it's people owning outcomes, owning responsibilities as an owner of the company. And as someone who has a real say in what goes on in the company, that's what culture of ownership really means. It's an aspiration. I don't want to make it sound like companies where we've done this, the workers are running the show, but it is about getting their input, acting on their input and having them participate in the upside, in the business. And as I say, it comes with rights and responsibilities on both sides.
So on the company side, there is a responsibility to act and behave differently. I don't think this is consistent with a slash and burn strategy, or if a CEO comes in and says, "Hey, I got an idea. Let's share ownership, and I'm going to go close a whole bunch of plans." I think, it doesn't mean that in a situation like that, there couldn't be a disruption in the business or a downturn or something where there necessitates something. There could be a technology change that necessitates a plant is not competitive anymore, but it's then how you operate. This goes back to Dov Seidman who wrote a great book called How, concept being, how you do what you do means everything.
So if you're operating in this way, I think the company has a responsibility in that type of a situation, how much notice do people get? Are they treated with respect or are they ushered out the door by security? What type of severance are they provided? Is it the bare minimum or are they treated like they really matter to the business. So I think that's what an ownership culture looks like. It's everyone behaving differently, treating one another differently, all with the same goal of making the business as good as it can possibly be.
Josh King (18:43):
So you gave us this example in your personal life about Clark-Schwebel about making those 60 calls. And the first call was pretty matter of fact, but the 60th call was really life changing for the person on the other end of the line. How has the model evolved from those initial offerings of employee stock to what you did for example, at CHI overhead doors? One which not only put money in the pockets of workers, but also changed how decisions and investments were made by the business.
Pete Stavros (19:13):
If you look at the arc of our own journey, I think it started with ownership. And over the last 12 years have really come to understand how important all the other elements are to making people feel trusted, respected, cared for, like they have a real voice and for the company to get the most out of the program. So I would say that the evolution of this program for us has been, it starts and stops with ownership, to being, "Oh my gosh, it's all about communication, operating transparently, opening up the business plan, giving people a voice, providing financial education." And it's aspirational as I said. We don't get to the end point in every situation. Sometimes, in a business like CHI, the leadership team really buys into this. They go all the way and they do an amazing job with it. And everything clicks.
I would say Ingersoll Rand would be another example, which was a NYSE listing that we did, where today you've got a public company with 16,000 employee owners in 80 countries that has a true ownership culture. And then in other cases, we don't get all the way there. Maybe the leadership team isn't quite as bought in. And that's, I'd say, a key success factor is how much does the leadership team want to do this? Because it's a lot of extra time and effort, but in every instance we are headed towards the aspirational goal. And it's just a question of how far along the path do we get.
Josh King (20:40):
Pete in the case of CHI, it really turns out that air conditioning, a million square feet of uninsulated space was a pretty important move for everyone to make.
Pete Stavros (20:49):
That was the first time we experimented with this version of delegated decision making. We've tried lots of different things, but this one was why don't we put a million dollars of CapEx aside for the workforce to decide how to invest it. And whatever they can nominate any ideas they want. We'll help them shortlist the ideas and then they'll vote. And whatever they want is where the money will be spent. Our only requirement was, we were not looking for ideas for productivity in this instance, or new machinery, we were looking for ideas of what would make this workplace better for you. And it often surprises people, how many manufacturing facilities in the US are not air conditioned. I've personally been in many more that are unconditioned than air conditioned for the reason you mentioned, which is these are enormous buildings, this one's a million square feet, 50 foot ceilings and uninsulated.
So it was quite an undertaking, but that was something that was important to the colleagues. And so that was the first instance, cost us more than a million dollars and obviously a fair bit of operating expense going forward. The fascinating part was we didn't count on this, but it more than paid for itself. So why is that? Part of it I could ascribe to, okay, engagement improved and people were less likely to leave, but more directly and more tangibly, quality improved and safety improved in the summer months when we were busiest. So the big season in garage doors is in the summer and in this plant, it would get to be over a hundred degrees in the dead of summer.
So it's the busiest time, it's the hottest time. People are exhausted, people are fatigued and what happens? They make mistakes. Sometimes it is mistakes that cause them injury and then less importantly, it causes quality issues. So if you look at, we actually graft out the parts per million quality factor and the recordable incident rate. And from literally one year to the next, first year, before the air conditioning, you saw a big spike in both in the summer months and then the next year flat. So that's the interesting thing about a lot of this stuff is, it's not the reason to do it, but it actually ends up being smart business and all this stuff pays for itself anyway.
Josh King (22:57):
So Pete, in May, Nucor Corporation NYSE ticker symbol, NUE, ended up agreeing to acquire CHI for 3 billion. How did that deal net out, both for KKR and the employees that are part of the program at CHI?
Pete Stavros (23:13):
So for employees, if you look at truck drivers, hourly workers in the factory, in the distribution centers, it ended up being about 175,000 on average, brand new employees in the last couple of years made between 20 and 40,000. Some of you who joined this year or last year made 20 to 40,000 and then it crept up from there. Hourly workers in the plant and the distribution centers who were the most tenured made 400,000. We had truck drivers make over 800,000. And in total it was about $350 million of value to the employees in a rural part of America. Where the average home price in this county is about 110,000. The average household income is about 55,000. So it's really potentially transformational at the community level, which is something we heard a lot from the employees, is not only is this going to impact my life, but this is going to change the whole community.
And then for the investors, back to this point of happens to be great for business, we made 10 times our money for our investors. It was the best outcome on a multiple of money basis for us since 1988, you'd have to go back to our Duracell investment. And so it's a great proof point that this can work. Everyone can participate in great outcomes and it can be hugely accretive to investors, not just good for workers.
Josh King (24:35):
As we head into the break, while the promise that a rising tide lifts all boats is good, how did those discussions go with the people who actually have to open their wallets for some of this?
Pete Stavros (24:45):
A couple of points. One is, it's not an opening your wallet idea, because it's equity that is a variable cost. So it only pays out to the extent there's performance. Second, we are talking about a really small amount of ownership required to make this work, for most companies. It could be different for a retailer with an enormous number of employees relative to the market capitalization or value of the equity. But for most companies, a very small change in the size of the equity program for management allows you to bring the entirety of the organization into ownership. And again, our experience is massively accretive and it's not a cost. It's actually a net benefit. We've got one case study. We went very deep studying with a strategy consulting firm and their estimate was it was about a 10X return. So the equity that was afforded to the non-layers of management.
So take the top two layers and say they would've gotten equity. Anyway, for all of the other folks, how much equity was given and what was the return. And when they looked at the avoidance of cost related to hiring, because the turnover went down, recruiting, training, productivity gains, one of the interesting things about productivity, when you have this turnover, just imagine how unproductive people are in the 12 months leading up to them to sign to leave the company, right? They've already got their one foot out the door. They're not focused, they're not engaged. And then likewise, the new people, how unproductive are they for the first year? So all the benefits, just stack up. I should also mention, when you talk to public investors who I know is a lot of the audience here, what they tell us is, we buy culture more than we buy strategy.
And when you can create this culture, it is infinitely valuable to public investors. This is what they want. This is what public investors call compounders. Why is Ingersoll Rand a compounder? It's because they've got an ownership culture and whether markets go up or down or what happens in the competitive environment, they've got an ability to react better than their competitors because of how they treat their people. And the culture that's been created over a decade.
Josh King (27:01):
Compounders, buying the culture, after the break Pete Stavros and I will discuss the launch of Ownership Works and his vision for changing how all businesses are run. And that's all coming up right after this.
Speaker 7 (27:16):
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Josh King (27:59):
Welcome back. Before the break, I was talking to Pete Stavros, KKR's co-head of America's private equity talking about his career and the development of his model for running companies. Pete, most workers receiving shares of companies as part of their employment over the last dozen years have probably done really well as a result, but perhaps, maybe only until the last six months or so. What's the message to them when a stock is headed down compared to when it's headed up?
Pete Stavros (28:27):
Well, it's long term. So we really try to avoid getting too caught up in what's happening quarter to quarter. That's the essence of private equity is driving change and improvement for the long term. For anyone who makes less than a hundred thousand dollars, all equity must be free to them. That's a part of our core principle of how we do ownership. It cannot be an exchange for wages or benefits or wage increases. So it must truly be free and incremental for anyone making less than a hundred thousand dollars. Point being, there's no downside or worse off. And then finally, if something really goes awry, let's say the market comes down another 30% what happens to CEOs in that case? They get their stock options repriced, and a core philosophy of ours is everyone's in the boat together.
So if we do that for the CEO and the C-suite, we do that for all the workers. Everyone's in the same boat together. So those are the three key messages. It's about the long term, there's no downside, because we're not asking people who make less than a hundred thousand to invest out of pocket and whatever we do for the C-suite, we do for the whole workforce.
Josh King (29:34):
Do you see a connection between a willingness to reimagine company ownership with the growing embrace of ESG by the market and companies?
Pete Stavros (29:43):
I think so. ESG today is almost entirely focused on climate and de-carbonization, which obviously is critical, but when it comes to the S, it's really just been diversity, which is also critical, but there's not really been a lot of focus on providing wealth creation tools to people at the bottom. And in any developed society, if you read Thomas Piketty's book, Capital, the bottom half of any of these countries owns less than 5% of the assets, that's certainly true in the US. Less than 5% of assets and way less than that of stock. And so I do think as we think about social sustainability, we need to spend more time on this issue, which is, I think, foundational to seeing progress on other aspects of ESG. We've got to have people able to live and plan for some kind of a retirement that's dignified. So yes, I think the focus on ESG, the focus on sustainability is good. We are still lacking focus on the social side of sustainability.
Josh King (30:51):
One company that has taken ESG really seriously, both with its launch of an electric bike and more recently with a broad based ownership plan is Harley Davidson, NYSE ticker symbol, HOG, of course. How were you introduced to Harley's CEO, Jochen Zeitz. And what lessons did you learn?
Pete Stavros (31:13):
I got introduced to Jochen through a friend and he had asked for an introduction because the historical relationship with the Union was actually good for a while and then turned sour. And you can actually Google Harley Davidson and Union. And you'll find some articles from maybe five, seven years ago where the unions are saying, "Look, it's war. There is no relationship." And so Jochen came in to turn Harley around. He is famous in the business world for the job he did turning around Puma. And so he came in to turn around Harley. And one of the things that was going to impede progress was the relationship with the workforce. And so he called and said, "I've read about what you guys are doing, I've seen some of the videos, I really would like to explore this." And I said, "Look, if you're serious about it, we'd love to help."
And so that was the beginning of it. And so we formed a steering committee, which included as we always do someone from operations, HR, finance legal. The committee reported to Jochen. And I was on the committee in the beginning just to get it started, help them size the program, structure it, help with some communication of the program. Jochen and I presented to his board to get the board comfortable. It was a great experience. I think a great case study of a really forward thinking progressive leader, who cares about his people and knows that without buy-in from his people, his program just can't succeed. It's just not possible without everyone pulling in the same direction. So that was the background there and how that came about.
Josh King (32:46):
You recently launched using a significant personal donation from you and your wife. I think $10 million of your own funds. Ownership Works, what's your vision for the organization, which I think includes 60 partners, a third of which are PE firms.
Pete Stavros (33:01):
The mission of the organization is twofold. It's one to help companies roll out and implement this model and work together to continuously improve the model. Because heaven knows we don't have this all figured out. So that part of the mission has an effort around structure and implementation. So how to size the grants, working through accounting, tax, legal, compliance, share plan administration challenges. It also includes how to communicate these programs, what educational work gets done. Then there's an effort around employee engagement and worker voice. We have a partnership with Gallup there. We're trying to build a world class center for employee engagement, to leverage ownership into greater levels of engagement. And then the final part is around financial inclusion and resilience. The foundation of which is financial literacy training, but also will extend into helping the underbanked or unbanked get banked, helping workers get access to their wages more frequently than a typical pay cycle, which could be every other week or maybe even once a month, which can be a real hardship if you don't have a nice savings buffer.
So that's part one of the mission is, all of that hands on practical, tactical help. Then the second part is more aspirational and a little less tangible, which is around movement building. So how do we get this to become more normal? The idea that everyone should be participating in good outcomes at a company, how do we normalize that? And a lot of that honestly is storytelling. So there's data analysis and facts and all the rest, but honestly, the thing that grabs people are the videos, the stories, seeing people's lives changed, hearing what this has done for communities that in our experience is what really will get things moving towards this becoming more normal.
Josh King (34:54):
We talked at the beginning of the show about what it was like around the Stavros household in the prior generation at the dinner table, the modern Stavros dinner table has you and Lindsay looking at each other and saying, "Look, we can give 10 million to philanthropic works, to charities, or we could put 10 million of our nest egg into Ownership Works." What's that discussion like?
Pete Stavros (35:16):
There's a really good book that Darren Walker who's president of the Ford Foundation wrote called From Generosity to Justice. And really the punchline is, if you're going to be philanthropic, look back on your life and look back on your career and figure out what injustices or unfairnesses or inequities do you see that you want to try and fix. And maybe some of them helped you get to where you got. And so one of the things that helped me get to where I got is, the concentrated nature of equity ownership. So I've been a beneficiary of very concentrated equity in this country. And I'm going to do what little I can do to try and help reverse that so that more people can get access to ownership because without ownership, it's just very hard to get anywhere. Just on your wages alone, it's really difficult.
And the way home prices and other assets have moved relative to incomes, we all know incomes have stagnated as interest rates have declined over decades. And they're still very low. I know the 10 years over 3%, but relative to history is still very low and that's caused asset prices to boom. And so people can't afford to buy homes and can't afford to make investments. Look at my own personal situation. My parents bought our house when I was, I don't know, six years old or something. I think they paid maybe less than that. Maybe I was even four years old. I think they paid 70, $80,000. My dad was making annually, maybe $35,000.
People doing his same job probably don't make that much more today. But that home is now worth hundreds of thousands of dollars. Given what's happened. If you can't afford a home, you can't afford investments. Where else can you go to get access to ownership and an appreciating asset? Well, work. This is one way to do it. Not saying it's the way, not saying it's going to solve all our problems. But I think combined with a lot of other reforms, could help.
Josh King (37:16):
Is there an established process to onboard a new company into Ownership Works' program?
Pete Stavros (37:22):
There is. We're still building out the team and all of the tools and templates, McKinsey, Ernst & Young, Deloitte, Kirkland & Ellis, many others have been working with us to templatize an approach. What tools, what timelines, how to, step by steps can we create that will help us really scale this? Because if the goal is to have this at hundreds and hundreds of companies, certainly within KKR, I can see a path to us having this at a hundred companies before too long. And if you look at the other 20 private equity firms or so who have signed up and you look at the size of their portfolio, we need something that can scale.
Our team just won't be big enough at Ownership Works to spend a hundred hours at each client company. It's going to need some technology and it's going to need to be a source of intellectual property, a beacon of sorts. Yes there's an approach to onboarding. It's probably, we're not going to be fully up and running until the fall. We've got about 12 people in the organization today on our way, hopefully to 20 by year end and maybe full strength would be 30.
Josh King (38:31):
So you and I have been talking about how you're focusing on educating management of companies on the benefits of the model, but you also need workers to buy in even more of a scaling problem in terms of the number of people that have a voice in this. When a person is working on an hourly wage, Pete and struggling paycheck to paycheck, how do you convince them to sign on to a program like this?
Pete Stavros (38:53):
Well, it's important again, to realize that there's nothing to sign on to. There's no cost, they're not giving anything up, there's no wage trade off or benefit trade off. They don't need to write a check. So it's purely incremental. And then the communication and education effort is a long journey. If you think about the generations of water under the bridge between workers and management, this is generations, going back to my great grandfather who was also in construction. This is not going to be fixed overnight, where you hand out ownership and you tell people good things could happen. They're going to have a voice. The initial reaction is I don't believe it, I don't understand it, and so this takes years of relentless communication and education and trust building, and some of the things we've talked about over the past hour, that only then, I think, can you start to change the culture and it takes actions, not words and time for people to see you really mean it.
But again, the really important thing is to double underline in bold face that there's no risk, no cost, there's no guarantee either it is equity. It might not work out, but that it is an incremental benefit for folks.
Josh King (40:06):
Something that we've talked about on this show a lot, Pete, is that despite its universal importance, not withstanding this program or others, there's just this lack of financial education for students and adults. Is there part of Ownership Works that's helping companies educate their workforces on personal finance and wealth creation?
Pete Stavros (40:27):
The treasury department estimates two thirds of Americans are financially illiterate. So it is not a poor person's problem. It is an epidemic in the country, financial literacy, and none of us are taught it. When it comes to managing, I'm supposed to be a finance expert, and I wouldn't say I'm that great with personal finance stuff. It's why we get help, my wife and I, and I think everybody needs some help in this area. We have been working on financial education for 12 years. I would tell you it's really hard, and we've done some survey work to understand why it's so hard. So to begin with, when you offer financial education, in our experience, we benchmark this, we think we're pretty average, about 3% of employees will take you up on the offer.
So the survey work has been to understand why is it three out of a hundred, take you up on an offer for free financial education? And the reasons are varied, but one of the most important ones is, people say, "Well, I have no assets. All I have is debt. And I know that I don't need to talk about it. I understand I have problems." So if you give equity as an asset again for free, it opens up a new avenue for conversation around financial education. So starting to prepare people for, "Hey, if this goes well, what could it be worth? What would you do with the money?" There are other challenges, not just, "Hey, I have no assets." There are sometimes language barriers. People say, I don't speak English that well, people don't have time and space in their lives to do this, people think the content's not that great or relevant. So there's a lot of challenges. And we plan on working really hard on this with a number of outside parties who are doing good work here, but it's difficult.
Josh King (42:13):
As we wrap up our conversation here, thinking back over the last couple of years, the pandemic, particularly stimulus financing has driven, increasing attention to what should be the role of government, corporations and individuals to ensure the economic viability of a society. What impact has that had on support from both the private and the public sectors for your model?
Pete Stavros (42:37):
Well, I think the pandemic certainly shined a bright light on the inequities in the economy. And then you had at the same time, of course, the murder of George Floyd, which shined a bright light specifically on racial equity. So I would say when you think about those two things from a COVID perspective, frontline workers didn't have the option to work from home. So if you worked in a grocery store or any retail establishment, you had no choice, a manufacturing facility, a distribution center. And so there was this brief moment of hazard pay if you remember that, didn't last very long, but ownership, I think could replace something like that. Those frontline workers, I think COVID emphasized how critical they are to the economy and their value. And so ownership, I think, could be something that recognizes that value.
From a racial equity perspective, when you look at broad based ownership, unfortunately, it disproportionately benefits people of color. So today we are all working so hard as a society to change this. But today, the top layers of an organization where all the equity resides, is typically over white, by a lot, white male. And so when you do push ownership all the way through an organization, there's a gender equity play, there's a racial equity play. So this does fit into the whole DEI push that so many businesses have gotten behind in the wake of George Floyd. So I think that's how I would answer it. On the COVID side, wow, our frontline workers are so critical. Shouldn't that be rewarded? And on the George Floyd, racial awakening side, there's a real DEI play with broad based ownership as well.
Josh King (44:26):
So Pete, where can our listeners, particularly the CEOs and board members who may be interested in implementing some of these lessons learn more about the topic of employee ownership and Ownership Works?
Pete Stavros (44:37):
We've got a place they can leave a message for us at ownershipworks.org. We have a lot of information on the website. We're very responsive. So if you do leave a message, you will definitely get a response. And we would love to talk to you.
Josh King (44:52):
Ownershipworks.org. Thanks so much, Pete, for joining us Inside the ICE House and taking this journey from the old Stavros' dinner table to the new one. It's been a great conversation.
Pete Stavros (45:03):
Thanks Josh.
Josh King (45:04):
And that's our conversation for this week. Our guest was Pete Stavros, co-head of the America's private equity platform for Kohlberg Kravis Roberts that's NYSE Ticker symbol KKR. If you like, what you heard, please rate us on iTunes so other folks know where to find us. And if you get a comment or a question you'd like one of our experts to tackle on a future show or conversations like this with Pete, email us at [email protected] or tweet at us @IcehousePodcast.
Our show is produced by Pete Asch with production assistance and Ken Abel and Ian Wolf. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next time.
Speaker 1 (45:47):
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content here in. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.
