John Davey, a conservationist and an environmentalist before those terms were popular, planted the Johnny Appleseed ideals of his company in 1880. Three generations of his offspring cultivated the crop, nurturing his Kent-based business to prosperity.
But thinning branches of the family tree yielded a decision that almost toppled the deep-rooted company in 1977.
It was an announcement R. Douglas Cowan vividly recalls.
”At that time, three branches of the Davey family tree held equal stock interest in the company,” says Cowan, chairman and CEO of The Davey Tree Expert Co. ”They brought us all into a special management meeting, announced that Jack Joy would be new company president, and said, ‘Oh, by the way, we’re selling the company!”
The revelation jolted the loyal work force. The feared consequences sparked an employee movement within the ranks. Leading the charge were senior management members Joy (who’d been with Davey Tree since 1957), Jim Pohl (then vice president of finance) and Cowan (who joined in 1974 as corporate controller).
On the workers’ behalf, they asked the Davey family to sell the company to its employees. But, believing the employees couldn’t raise enough money, the family considered bids from outside buyers.
”We knew we had to do whatever it took to ensure that Davey Tree stayed in our hands. If we didn’t buy the company and try to make it work, somebody else would, and we weren’t willing to let that happen,” Cowan says. ”So we immediately assembled an employee acquisition team to pull the financing together.”
Heartened that the proposed employee stock ownership plan (ESOP) would enable the worker/owners to deduct both the interest and the principal of the loan (and swayed by rumblings that many workers might defect and start their own companies), the family accepted the proposal.
On March 15, 1979, 113 employees with five or more years of service partnered in the $6.8 million purchase to become owners of Davey Tree, with more than 400 of the company’s 2,500 employees participating in the ESOP.
”If you were an employee and you met certain criteria, you were a member of the ESOP even if you weren’t part of the buying group,” says Cowan, explaining that the 113 workers were part of the initial ”stock subscription offering” (buying program) and 400 were part of the ”stock granting program” (the ESOP).
That was in 1979. Considering Davey Tree’s compounded growth rates of about 8 percent and a $275 million sales increase in two decades, the employee-owners have cultivated quite a money tree.
The new caretakers
Comparing the numbers before and after the acquisition, Cowan says net profit has mushroomed from $1 million to $12 million. In the late ’70s, sales volume was about $50 million and there were 2,500 employees. By 1985, sales neared $200 million, with 5,000 employees on board. Year 2000 revenue topped $323 million.
Today, the company — which provides tree, shrub and lawn care, grounds maintenance, vegetation management and consulting services throughout the United States and Canada — has 6,000 workers, 450 of them in Northeast Ohio. In the September/October 2000 issue of Business Ethics, the magazine ranked Davey Tree as the 20th largest employee-owned company in the country, based on the number of employees.
Of its total work force, approximately 58 percent are employee owners who, through a 401(k)/SOP and direct ownership, own 92 percent of the company.
”As the loan was repaid, the ESOP become a combination 401(k)/SOP, in which employee contributions are partially matched with Davey stock,” Cowan says.
David Adante, executive vice president and chief financial officer of Davey Tree, says these noteworthy numbers prove that employee ownership makes all the difference.
”Davey Tree owes a great deal of its success to its ownership arrangement,” Adante says. ”As owners, the people who work at Davey feel responsibility for the company’s prosperity. We work harder because we have a vested interest.”
That was the driving factor for employee owners who, in turn, increased the price of Davey Tree stock 25-fold. At the time of purchase, adjusted for splits, it was 47 cents a share. Today, it’s $11.60 a share. Cowan says that if a worker invested $40,000 in 1979, the stock’s worth would be close to $1 million today.
”I had to sell some property I owned and I borrowed money on top of that. It was a real gamble, but it’s really paid off,” says Clay Cole, a residential operations manager. ”A lot of people went out on a limb, but it was worth it.”
Indeed it was, says Cowan.
”To date, our company has created about 25 ‘paper millionaires,”’ he declares.
Pruning for profit
When the employees climbed out on a limb to buy the business 22 years ago, the prime rate inflated to 20 percent within six months, burdening the balance sheet.
”We had four times the liability that we had equity, so we really buckled down to get rid of the debt,” Cowan says. ”To reduce the debt-equity relationship of $16 million to $4 million to the pre-takeover figure of $10 million to $10 million, all expenditures were scrutinized, and more than a dozen marginal and unprofitable tree-care territories were shut down.”
By 1983, it was almost back to one-to-one. That same year, the company reorganized to simplify operations, capitalize on leadership expertise and develop management succession. Three executive vice presidents were appointed to manage three consolidated divisions: the Davey Tree Surgery Co. (a West Coast subsidiary established in 1928); the parent company in Kent and everything east of the Rockies; and all finance, administration and technical sections.
Then, in 1992, operations reorganized around Davey’s core customer groups: utilities, residential and commercial.
”Before that, we had regional VPs in charge commercial, residential and utility customers in each region. That strategy was preventing us from maximizing on national market penetration,” says Cowan. ”The way we’re organized today is the only way we should be organized in this marketplace.”
Now, about 50 percent of Davey’s total volume of business is attributed to its utility market services, which include distribution line clearance and transmission right-of-way maintenance, substation maintenance, and utility pole inventory and management.
Combined revenue of commercial and residential services — tree, shrub, lawn care services and grounds maintenance for corporations, universities and commercial clients, and tree, shrub and lawn care for homeowners — accounts for 45 percent of sales.
The remaining 5 percent of Davey’s income is derived from technical and consulting services, formed in 1992 as the Davey Resource Group (DRG). A new sprout on this branch is Davey’s natural resource consulting and environmental planning division. Launched in May 1997 as the conservation science group, this team comprises aquatic biologists and entomologists, wetlands scientists, vertebrate biologists, conservation biologists and environmental planners.
”To reach our revenue goals, DRG will have to develop its capabilities and penetrate the market as quickly as possible. Continued success will then allow us to reinvest in people, education, computer-based technologies and research,” Cowan says.
In the meantime, Cowan hopes DRG will establish the company as ”the Harvard of the horticulture industry.”
”We want to offer the best training and education programs in the industry,” he says, ”in addition to premier consulting services that enhance our core businesses and our national image.”
Cultivating the crop
Managing a company with 6,000 employees in the United States and Canada might be challenging for some CEOs, but Cowan says it’s no problem when employees own the company.
”You hear CEOs say that a company’s responsibility is first and foremost to the stockholders. In a legal sense, that’s true, but if your most important focus isn’t on the employees, you’re going to have problems eventually,” he says.
”We try to stay focused on our employees — and it helps that they’re our stockholders,” he jokes.
Davey Tree’s theory is that when employees are taken care of, customers get the best possible service. Customers then reward the stockholders. Encouraging employees to please those customers isn’t even an issue when an employee is his own boss, Cowan says. Here, employee compensation systems are structured to reward a go-the-extra-mile attitude and foster the entrepreneurial spirit.
”As long they’re a profit partner with us and do what they need to do, these folks make pretty good money,” says Cowan.
For example, in its residential market mix, Davey has about 75 distinct branch operations around the United States and Canada. District managers receive monthly financial statements that reflect credits and debits for their sales and expenses. There’s an overhead charge, and at month’s end, the manager’s compensation is essentially 50 percent of the bottom line profit. So it is to his or her advantage to make the branch as profitable as possible, Cowan says.
”Our salespeople are expected to sell X dollars per year of certain services, and we have volumes of information on sales by salesperson and by territory,” says Cowan. ”But we don’t track how many calls they make or monitor their close ratios. Frankly, we don’t care. What we care about is the volume of sales and the quality of the services.”
Incentive differs for employees in the utilities and commercial markets, because much of that work is bid at the corporate level. In addition to their salaries, local managers receive incentives for lowering costs and enhancing safety and other concerns of that nature. They, too, receive monthly statements that reflect the performance of their operations.
”They have to be self-starters because we can’t watch them every day,” says Cowan.
As for Davey’s tree surgeons, they’re paid competitive hourly rates, plus overtime.
Seeds of knowledge
Although seeds of new best-business practices have replaced a few former Davey policies, employee enlightenment is part of the company heritage that remains a priority, says Cowan.
Back in 1909, Martin Davey Sr. founded The Davey School of Practical Forestry, a three-month training school for employees. Today, it’s a one-month course taught at The Davey Institute, and it’s called The Davey Institute of Tree Sciences.
In addition to learning John Davey’s original tree surgery procedures (he invented that term and the techniques), students also scale the same trees he once climbed in Kent.
Cowan says that today, Davey Tree budgets about $2 million for education, training and employee communications. The Institute also offers other extension courses to its employees and arborist training through the Davey Tree Web site, where more than 640 people registered in the online education programs.
In the works is Davey’s distance learning degree program in conjunction with Kent State University. Cowan says the two-year technical degree in urban forestry would be issued by Davey Institute in conjunction with the university.
The founding father would be proud, Cowan says.
”He was a simple man who crusaded for the proper care and conservation of trees, and all he ever wanted to do was alter a nation’s attitudes about tree care,” Cowan says, noting that Davey went into debt to write and publish his scientific how-to treatise in 1901, entitled ”The Tree Doctor.”
At the time of his death in 1923, demand for John Davey’s tree services had brought annual sales to $800,000. When his sons and grandsons took over the company, they followed his principles to the letter: pay bills promptly, treat employees fairly, reward them well, deliver quality service, closely monitor expenses, and make a reasonable profit, among other caveats.
When it comes to profit, the employee owners make no secret about their desire to keep their company all in the family. Ten years after the initial employee purchase, Davey Tree had a second employee stock subscription offering in 1989, and another is currently being planned.
And a recent bylaw amendment prohibits stock from being bequeathed beyond one generation, after which it must be sold back to the company.
”We routinely receive inquires from venture capital groups and other companies in the green industry, but their only interest is to get bigger and make a lot of money, so we steer clear of them,” Cowan adds.
Most important, says Cowan, even though the firm is now employee-owned, its founder’s traditions are still in practice today.
”Our corporate personality is probably one of extreme humility. That’s one of the endearing qualities about our company — everybody’s pretty down-to-earth and unimpressed with themselves.”
How to reach: The Davey Tree Expert Co., (330) 673-9511
Victoria Reynolds is a contributing editor to SBN Magazine.