Here’s an idea for running a company that could cause a CFO hearing about it to spill his or her coffee, or perhaps pass out cold: Don’t try to maximize profit, even over the long term. Don’t try to maximize shareholder return. In fact, whatever profit you don’t reinvest in the company, give most of it to charities.
In addition to that oddity, consider this one: The CEO, Rob Waldron, is working under a 20-year employment agreement. He has an equity stake in the company, but it’s not really his until the 20 years are up. That’s in 2029. If he leaves before then, he’ll lose it.
Waldron agreed to the mega-long commitment in 2009 with Curriculum’s longtime CEO and owner, Frank Ferguson, who was retiring after 40 years at the helm. Competitors were asking about acquiring Curriculum, but Ferguson wasn’t interested. He felt deeply passionate about the company maintaining its independence, which would further his goal for its work and his legacy to continue past his lifetime, according to Waldron.
“I’ve run a for-profit company that had investors in the past,” Waldron says, “and my experience was that during the day they were talking about building a great company and at night they were talking about flipping it to the highest bidder.”
Why restrict yourself by signing a 20-year contract? Waldron says he too is passionate about the work and trying to create positive change by developing well-researched products that make classrooms better places for students and teachers. He views the deal as “beneficial for the company, its stakeholders, and my own leadership lens. At the helm of a company charged with putting students and teachers first, this contract, and the long-term view it requires me to take, guides decisions that deliver on our mission and removes pressures to focus on short-sighted financial gains.”
One of Waldron’s first big tasks at Curriculum was to change the company’s ownership structure, in order to both solve a tax problem and preserve the company’s independence. At the time it was an S corporation, of which Ferguson was the vast majority shareholder. Unless that situation changed, upon his death the company would be valued and Ferguson’s estate would owe Massachusetts and federal taxes equal to about half of that value. The estate may have had to sell the company in order to pay the taxes.
Waldron and Ferguson looked at a number of solutions, including becoming a nonprofit and creating an employee stock ownership plan. The ultimate answer was fairly simple: convert it to a limited liability corporation.
But Ferguson had another goal. He’d come to believe that the ideas of Martin Seligman, a psychologist who has written extensively about happiness and believes giving is life’s greatest pleasure, were on target. So Waldron and Ferguson formed a 501(c)(3) charitable trust, which became effective on Jan. 1, 2010, that was intended to ultimately become the company’s owner.
The idea involved Ferguson donating his shares in Curriculum to the trust, which would thereby become the company’s majority owner. As an LLC — a partnership — the company could elect to make profit distributions to the partners, which would be the trust and, in proportion to his equity stake, Waldron. Trustees, initially Ferguson and an independent attorney, would decide what charities to give the money to. Upon Ferguson’s death or disability, Waldron would become a trustee along with an additional attorney.
That plan has not yet been realized, as it’s dependent on two events happening. One is receiving a private letter ruling from the IRS, allowing the setup. Owing to Ferguson’s preference to “set this change in motion at a slow but steady pace,” Curriculum waited until 2013 to seek the ruling, Waldron says, but he expects to get a favorable result relatively soon.
The other requirement is for Curriculum to achieve sufficient excess capital to begin making distributions to the trust. The company has tripled its revenue over the past three years thanks to demand for its new online educational materials, and for now it is reinvesting all profits into continuing that growth. The current projection is that the company will be ready to begin its charitable activities no later than 2017, says Waldron.
Ferguson was president of Bose Corp. from 1969 to 1975 before joining Curriculum, of which he is still chairman. In what may be a coincidence, Bose in 2011 began a somewhat similar charitable arrangement. It donated a majority of shares in the privately held company, in the form of non-voting stock, to the Massachusetts Institute of Technology, from which founder Amar Bose earned both bachelor’s and doctorate degrees and where he taught for 45 years, even while running his company. Bose Corp. makes annual dividend payments to shareholders within company management and to MIT, the vast majority to the latter.
According to Waldron, Bose and Curriculum worked on developing their charitable initiatives independently at around the same time. Still, he says, Ferguson and Amar Bose shared an orientation that a short-term focus on satisfying Wall Street was not in the best interest of a “research-driven” company.
“Frank never cared most about driving the highest profitability when he was running a company,” Waldron says. “He was dedicated to long-term thinking for the success of a research-driven company, and the ‘some profit’ model suited that, blending the mission orientation of a nonprofit with the entrepreneurial atmosphere of a for-profit organization. There is nothing in my contract that says I must maximize profit or shareholder return, yet I know that if I don’t create profit we won’t survive.”
But having a “some profit” mentality might just be a way to maximize results anyway, he suggests.
“Many, many people today want to work at a company that is strongly ethical and is successful but that they feel is not about money all the time, so we get good people,” says Waldron. “It’s hard to get a job here, but our acceptance rate on the job offers we do make is 96%. I can tell them that we’re going to be somewhat profitable, but I’m not going to take advantage of the place, and I’m not leaving.”
And that, he adds, “means they get to focus on the work rather than PowerPoint presentations to investors about what we’re going to do this quarter to get them more money. And they don’t have to worry that the company will be acquired, half of them will be fired, and the midsize-company atmosphere and pace they loved will go away because of someone’s financial engineering or to pay a private equity firm a dividend.”
After a downturn in the K-12 publishing industry from 2008 to 2010, the industry today is slightly smaller than it was before the financial crisis, according to a monthly index from the Association of American Publishers. But Curriculum, according to Waldron, has grown from revenue of $26 million in 2008 to an expected $130 million this year.
“It turns out that the company in our industry with the longest-term view, and without short-term pressures, has had the best short-term results,” he says. “I’m not saying that companies that maximize shareholder return aren’t good citizens. I’m saying it’s not the only way to run a company.”