Local loan funds targeted to invest in their communities are part of the answer. Ohio now has a number of such loan funds in the public sector at the city and county level; their money comes from repayment of Community Development Block Grant loans and Urban Development Action Grant loans. The State itself does a good bit of economic development lending from the Ohio Department of Development's programs. There are also some private sector local loan funds, including the Common Wealth Revolving Loan Fund in Youngstown and A New Beginning Trust in the Shenango Valley. These loan funds provide senior and subordinate lending to Ohio employee-owned firms.
What has been missing has been equity investment. As anyone who has struggled to avert plant shutdowns knows, lack of friendly equity investment is a key problem. Without the equity, you can't get the loans.
During the last several years, Owners at Work has reported in considerable length on efforts to anchor capital through a variety of local equity investment funds in the United States and Canada.
We've followed the development of the Crocus Fund in Manitoba, Canada, as one model for how to anchor capital locally. (See Owners at Work, summer 1995 and summer 1996) The Crocus Fund is a labor-sponsored mutual fund which raises its capital locally for local reinvestment. The Crocus Fund, now in its fifth year, has raised more than $60 million Canadian from some 14,000 shareholders in Manitoba.
Another model is the Steel Valley Authority's effort to develop regional funds that pool pension fund capital for local investment. (See Owners at Work, summer 1995.) In an exciting development that has great promise, the SVA has obtained foundation funding to support the development of such funds in Pittsburgh, Cleveland, Baltimore, Boston, Seattle,and Milwaukee in the United States and Toronto and Winnipeg in Canada. The Canadian funds will use the existing labor-sponsored investment funds -- the First Ontario Fund and the Crocus Fund -- as their foundation.
A third model calls for attracting conventional venture capital funds to employee ownership. Churchill Capital has the largest fund targeted for ESOPs. American Capital Strategies has a small fund for ESOP equity. Now Keilin and Company, which has done investment banking for a number of major ESOP transactions, including the United Airline's deal, is seeking to establish a new mid-market turnaround fund with a preference for ESOPs.
It has been five years since the Crocus Fund opened its doors for business. Crocus's purpose is simple: the Fund was set up to anchor Manitoba employees' capital in job-creating investments in Manitoba. To do this, we invest in partnership with growing closely-held Manitoba companies, helping them find capital for expansion; we help fund ownership succession; and we occasionally invest with management and employees to avert an outside buyer interested in moving our jobs south.
Crocus is sponsored by the Manitoba Federation of Labor as a labor-sponsored investment fund under Canadian law, but we invest in non-unionized as well as unionized companies. We screen all the companies we invest in for their health and safety records and their commitment to employee participation. We have a preference for investing in employee-owned companies or companies developing broader ownership structures, and we often expect to exit from our investment position by selling our stock to employees.
We also try to use our investment strategy to improve the quality of jobs. Working people's money ought to be invested to improve their working lives and those of their neighbors.
To put Crocus in an American perspective, it is a mutual fund set up to receive the Canadian equivalent of Individual Retirement Accounts. Our goal is to raise a large capital pool in small amounts from a large number of people. The model for Crocus and all the other Canadian labor-sponsored investment funds is the Quebec Solidarity Fund which has raised over $2 billion, and which is by far the biggest single source of venture capital in Canada. It is also a major tool for growing Quebec's economy despite the movement of English financial institutions out of Quebec.
Five years of growth
In taking status of the Crocus Fund's first five years, we have to look at the numbers -- money raised, money invested, jobs created, businesses retained, increases in net asset value. These are very strong numbers -- numbers which we believe continue to make us the leader among the twenty-four Canadian labor-sponsored venture capital corporations. These numbers continue to exceed the expectations of even the most optimistic among us when we went to market in 1994.
By the end of our 1997 investment season -- our fourth investment season -- the Fund's assets had grown from our initial capitalization of $3.25 million to $62 million. (See the graph.) Most of this new capital came from individual shareholders. The Fund attracted 5,000 new shareholders in 1996 and another 2,000 new shareholders in 1997, bringing the total number of Manitobans who have invested to close to 14,000. We have also received new institutional placements from the Workers Compensation Board, and Manitoba Blue Cross.
Our targeted investment portfolio almost tripled over the past year, with about $30 million now invested in small and medium sized Manitoba businesses. These investments, in what Martin Cash of the Winnipeg Free Press called "an all-star list of growing, private Manitoba businesses," contributed to the job security of more than 3200 Manitoba em-ployees, directly saved more than 220 jobs, and facilitated the creation of close to 1000 new permanent jobs. In addition, our recent investment in Isoboard Enterprises, which will manufacture particleboard from straw stubble, will create close to 350 construction jobs over the next year and a half.
But as we have said over and over again, the Crocus Fund was not created solely to generate numbers. When you invest in the Crocus Fund, you are taking a stand for all Manitobans against the effects of globalization. You are saying that there is an alternative to the low road of wage reduction, downsizing, and community abandonment.
Two of our recent examples are illustrative.
One of our investee companies is Carte International. Carte manufactures transformers for the electrical utility industry from two Manitoba facilities - one in Winnipeg and one in Morden. Prior to 1996, the company had been through a restructuring and was operating profitably. When the owners moved to sell, their most attractive suitor was a U.S. based multinational. Their purchase would have been primarily for the customer base, not for the operating capacity. A complete shutdown of the Morden facility and a significant downsizing of the Winnipeg operation were likely.
When Crocus was approached by Carte management to meet the U.S. offer and maintain full operations in Manitoba, we welcomed the opportunity to take a careful look. Our joint ownership with the management group, which we believe will soon be expanded to include all employees, has allowed the company to remain Manitoba owned and operated - preserving more than 180 jobs.
We also invested in National Leasing Group, a Manitoba headquartered company which provides commercial leases on small ticket items all across Canada. The availability of a friendly investment partner ensured that the company could grow rapidly and continue to compete with its giant competitors from right here in Manitoba. National Leasing also eagerly implemented a broad-based employee ownership plan.
Another exciting development in 1996 was the opening of Green Gates in Headingly. By the end of the year, Marion Warhaft of the Winnipeg Free Press had selected it as restaurant of the year. For us, Green Gates is not just an extraordinary country inn. It is also an opportunity to have significant labor market impacts on a sector which has generally viewed its workforce as transient and treated them poorly. Green Gates is dedicated to the proposition that high quality restaurant jobs, with good wages and benefits, career advancement oppor-tunities, empowerment through participation, and financial security through ownership, will translate into high quality service.
If Green Gates is successful in proving this connection, they will put pressure on their competitors in this sector to match their practices and transform restaurant work into an occupation with a viable, long-term career track. We are assisting their effort through the provision of extensive supervisory training and financial education programs on-site.
Beyond the numbers
Thanks to the support of thousands of Manitoba employees, we've had the capital to make good investments in good companies. But Crocus is more than numbers.
When you invest in the Crocus Fund, you are committing our community to a path through which we will own our own economy. We are investing our savings for our own benefit. We are supporting our entrepreneurs and helping them grow their businesses. We are competing through long-term investments in people as well as hard assets, and by creating quality jobs for empowered workers motivated by a financial stake in their own company.
These steps which we are taking are important for our financial security, for the quality of our lives and for the opportunities which they will provide to our children - a good and productive job in our own home town.
These steps are also important to protect our democracy. One of the primary missions of the Crocus Fund is to promote employee ownership and employee participation in corporate governance and management. We have done that in a number of creative ways. We have designed unique ownership plans which provide an ownership stake for all of a company's employees. We have been assuring ourselves, before we invest, that senior managers of companies in which we are considering an investment are committed to participatory management. We have created a CEO Roundtable as a forum for senior managers of our investee companies where the best practices we know for effective participatory management are introduced and discussed. We customized in-house educational programs which increase the capacity of workers to participate meaningfully by teaching them how to read and understand financial statements, as well as communication and supervisory skills.
Employee ownership maintains local ownership. It assures that business decisions are made locally. It provides a mechanism for inter-generational transfer. Comments by senior managers at Brandon-based Cando Contracting, another 1996 Fund investee which has expanded its already broad-based employee ownership program, illustrate this point. Controller Colleen McCarl notes, "The whole buy-in concept is an excellent opportunity, particularly for young people. I can't even imagine how I would have felt if someone had given me the chance, at 22 years of age, to buy shares in a successful company."
Cando President Gord Peters, while still far from retirement age, commented, "I said a long time ago that I did not feel that an individual was successful in business until the business went from one generation to another. It's been my wish for sometime to have an employee ownership package."
Finally, employee ownership is important because study after study has shown that companies with broad-based employee ownership and an effective shopfloor participation program consistently outperform conventional companies.
There are a variety of different reasons for that. The most obvious is because better decisions are made because people close to the decisions have input. Sometimes that's true. Other times, it isn't. Sometimes it's simply because decisions are better understood. Exactly the same quality decisions are made, often by the same people, but because you understand why your supervisor made a particular decision, you are more likely to implement it more willingly and more effectively. There are a variety of reasons why we get these positive empirical outcomes. In the end though, one critical reason for our companies to facilitate participatory management is because when our companies are performing well, our investments are performing well, and our shareholders are reaping the benefits.
Beyond the plant gate
Social science studies in North America, beginning as early as the late 1950's, barely a decade after the fall of the authoritarian Nazi regime in Europe, showed that people believed in democratic values in the abstract, but not when confronted with specific uncomfortable applications. They, for example, believed in freedom of speech, but opposed the right of someone with views of which they disapproved from speaking on the courthouse steps.
Why did this occur? We teach the platitudes of democracy in a formal civics or history class, but we teach that class inside of an institution which is not terribly democratic. Why is that? One of the reasons is because they are preparing to work in workplaces which historically have not been democratic. So there is an enculturation process occurring in schools, families and other institutions to prepare people for a certain kind of work environment. That work environment was successful for a long period of time. But one of the unanticipated consequences of that is a society created in which belief in democracy was a mile wide and an inch deep.
But if you can change the workplace, and are able to do that on a large scale, you create a lot of pressure to change the institutions which prepare people for the workplace. So a more democratic workplace results in a more democratic educational system which results in a more democratic family. All of those things promote, in a very meaningful way, democracy in our society. Democratic workplaces increase the prospects that authoritarian or totalitarian governments couldn't come in with the kind of results that have existed in the Western world, even in this century.
When you have that result for society, combined with the fact that these companies outperform conventional companies, it becomes quite compelling for us to go down this road we are presently travelling. I want to thank the CEO's who have come to share this vision with us and look forward to walking down this road with them and the 3200 workers and worker-owners who make their companies successful.
I can't imagine better traveling companions.
Sherman Kreiner is the CEO of the Crocus Fund in Winnipeg, Manitoba. The numbers cited are in Canadian dollars; as this article went to press, the Canadian dollar was worth about 75 cents. This article originated as Kreiner's remarks to some 300 shareholders at the Crocus Fund's fifth annual general shareholders' meeting in February 1997.