Louis Kelso’s Employee Ownership Ideas Live On In KKR’s Pete Stavros

Kelso died a few months after we met, and I lamented the fact that I’d never see him again. I was wrong. I see Louis Kelso every time I see KKR’s Pete Stavros. 

Pete Stavros has advanced and improved upon Louis Kelso’s notion of worker ownership. PATRICK T. FALLON/AFP via Getty Images

Some religions believe in reincarnation. If reincarnation is really a thing, KKR’s Co-Head of Global Private Equity, Pete Stavros, might be Louis Kelso reincarnated. Kelso invented the employee stock ownership plan, inspired by a simple notion: capitalism should work for everyone. Kelso and other critics foresaw that untethered capitalism would lead to widespread wealth and income inequality because the power conferred to capitalists by their wealth and disproportionate influence on society enabled them to exploit workers. Which is exactly what has happened. Since 1979, wages of the top 1 percent increased 160 percent, while the share of wages for the bottom 90 percent decreased.

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Kelso’s prescient foresight led him to design a mechanism whereby workers could share in the upside potential of their capitalist employers through part ownership of the company. His idea was embraced by Congress, which created legislation to activate the Employee Stock Ownership Plan (ESOP).

I learned about Louis Kelso and ESOPs as a student at Princeton University. My dad worked on the assembly line at a General Motors car factory in Delaware. He got the job a few years after his northern migration from sharecropping in Georgia. While General Motors was several rungs up the economic ladder from sharecropping, our family went through ups and downs of labor-capital clashes: strikes, layoffs and other disruptions to a steady income. I thought there was a better way and started researching the history of labor and capitalism. That’s when I learned about Louis Kelso and read every one of his books I could find at Princeton’s Firestone Library.

Pete Stavros has advanced and improved upon Kelso’s notion of worker ownership. He also has a lot more information and data than Kelso had in his day. For example, today, we know that at least 70 percent of all workers are disengaged from their employers. A sizeable portion of that 70 percent is so disengaged they actually sabotage their employers by throwing sand in the gears of the business. We also know that $8.8 trillion in global annual profits are lost to employee disengagement, and $550 billion in annual profits could be gained in the U.S. alone if more employees were engaged with their employers.

As a philosophical matter, Pete Stavros knows that the trick to employee engagement is culture. One leading business academic, MIT Sloan School Professor Zeynep Ton, refers to this as the Good Jobs Strategy. She co-founded the Good Jobs Institute to help businesses improve their cultures. For most business leaders, “culture” seems fuzzy. That’s largely because business schools and popular culture have systematically tricked us into becoming quantitative hedgehogs, blinded to the 360-degree view of the world that includes quantitative metrics and qualitative psychological assessments.

Culture is hard to measure with traditional quantitative tools, but it can be assessed and improved. However, as former Financial Times editor Jonathan Guthrie has written, finance people are narrow-minded hedgehogs lacking the intellectual force of foxes. In a business context, foxes know that superior operational design (which is conducive to quantitative measures) and superior human capital investment (which requires qualitative understanding and empathy) can generate superior financial returns. Pete Stavros is a fox. He knows that an engaged factory employee working in a great culture of purpose and community can increase their production rate when they know that everyone will reap the benefits of that improvement.

A great culture improves worker engagement. Worker engagement is the fountainhead of innovation, productivity and profitability. 

Masters of the Universe are often wrong but never in doubt. They are blinded by their own sense of brilliance and miss the basics of humanity. Masters of the Universe assume they are experts at everything. Most private equity experts I’ve encountered believe they are operational experts equipped to design and execute operations better than seasoned executives. KKR discovered decades ago that operational design requires expertise outside the investment domain and funded an internal operations consulting practice. Today, that practice has been supplemented with KKR’s Centers of Excellence to advance the power of human capital in their portfolio companies. 

The Good Jobs Institute, KKR’s Center of Excellence, and Stavros’s broad-based employee ownership strategy to improve culture and drive innovation and productivity are examples of the type of Patriotic Capitalism that fits within the Ford Foundation’s Quality Jobs impact investing theme. Every company in the world—and society itself—stands to benefit from its broader adoption. 

One of the greatest thrills of my life was meeting Louis Kelso in late 1990. I found his phone number by searching a six-inch-thick San Francisco telephone book. I convinced the secretary who answered the phone by passionately describing the paper on employee ownership I was working on as a second-year Stanford Law School student. She connected me with Mr. Kelso, and he agreed to meet me for lunch.

Kelso died a few months after our lunch, and I lamented the fact that I’d never see him again. I was wrong. I see Louis Kelso every time I see KKR’s Pete Stavros. 

Louis Kelso’s Employee Ownership Ideas Live On In KKR’s Pete Stavros