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Robert Iwamoto Jr. made his employees part owners in Roberts Hawaii. Why that’s smart business for homegrown companies that want to leave a local legacy

The story of Roberts Hawaii began in the little town of Hanapepe on Kauai’s west side.With one car, the industrious son of Kauai, Robert Iwamoto Sr. started transporting people, mostly soldiers, around the Garden Isle. Robert Iwamoto Sr. did well. So well, he bought five more cars and opened Roberts Rent-A-Car.

His son Robert Jr., at the age of 15, joined the family business as it expanded again, offering island tours in “long stretch sedans.” By the late ’50s, the company had purchased its first bus and moved its headquarters to the new airport in Lihue. Then the ambitious Iwamoto family bought Kauai’s first air-conditioned motor coach. A significant event in 1957.

photo: Jimmy Forrest

In 1964, Roberts Hawaii made the bold move of opening offices on Oahu. Soon after, the company expanded to Maui and the Big Island. Roberts Hawaii also expanded into baggage service and began offering sunset cruises. In 1974, the Iwamoto family made its boldest move: It put four luxury motor coaches into the market and took on the market leader at the time, Mainland giant Greyhound.

As the story goes, Robert Iwamoto Jr., remembered watching a greyhound race in Mexico while on leave from the Air Force. He remembered the greyhounds never caught the rabbit. So he branded his buses with a bright yellow, lei-wearing rabbit. A few years later, Greyhound left Hawaii, and Robert Iwamoto Jr., added another logo: a rabbit waving “aloha” to the departing Greyhound.

That story still brings smiles today in the company headquarters at Dole Cannery. Roberts Hawaii is the kind of local success story that Hawaii loves. Today, Roberts Hawaii is one of the state’s largest companies, ranking No. 100 on our Top 250 list. Today, the homegrown company employs 1,405 people, many who have been with the company for years.

Now the Iwamoto family has made what will be perhaps the company’s most memorable move: Robert Iwamoto Jr., has decided to give back to the people who helped him build and sustain the company over the years; he made them all part owners. Neil Takekawa, president of Roberts Hawaii, says Iwamoto Jr., now 68, is at a point where he can slow down and enjoy life, and he wants to be able to benefit from the value that has been built into Roberts Hawaii over the years. “He needed an exit strategy,” says Takekawa.

His options were to sell the company, most likely to a Mainland entity or to attempt to go public. Iwamoto could also have started breaking up the company and selling off the parts. The last, lesser known option was to start an Employee Stock Ownership Plan, or ESOP. With this plan, the company takes out a loan to pay off the owner, in Roberts’ case, for a minority stake of about 44 percent, according to press statements. That ownership stake is then given to employees in the form of a retirement trust fund.

By far the easiest option was selling the company, says Takekawa.

“But if you sold to a Mainland entity, the whole culture of the company would shift, maybe for the better, maybe not. It’s a gamble, and you don’t gamble with people’s lives,” Takekawa says. At least, Roberts Hawaii doesn’t. Roberts is creating what will be the largest ESOP by employees in Hawaii. “This sure makes sense. Leaving it with the employees, leaving it in Hawaii,” he says.

ESOP 101

The concept of an employee ownership plans was first developed by American lawyer and visionary Louis Kelso in the 1950s. Kelso believed that real wealth was concentrated in ownership and the only way to fairly distribute wealth was through sharing ownership. Kelso had created ESOPs in his own companies for several decades, but it wasn’t until the mid-’70s, when Sen. Russell Long, of Louisiana, started backing the idea, that it really found an audience.

In 1974, the federal government passed a bill to foster ESOPs by giving incentives such as tax breaks. But Frieda Takaki, chairwoman of the National ESOP Association, says tax breaks are only the tip of the iceberg in the benefits of ESOPs. The ultimate benefit in making employees part owners is in productivity.

“Your people start thinking like owners and owners are not 8-to-5 workers,” says Takaki, who is president and CEO of CHART Rehabilitation of Hawaii, a 100 percent employee-owned company.

Maui Divers of Hawaii Ltd. CEO Bob Taylor photo: Ronen Zilberman

Takaki says CHART arrived at the idea of an ESOP like most companies do. The original owners wanted to sell the company and a Mainland buyer was interested. But Takaki approached the owners and asked, “What if we meet your sale price?” Takaki pulled it off. Through an ESOP, she was able to get the money for the company and in the process, ensure the company remained a local company with local values.

In CHART’s case, like most ESOPs, the company borrowed the money from a bank to pay the owners and, as the loan was paid off, it created trust to hold the employee stock bought from the owners. Also, if the company turns profit, once the loan is paid off, the employee’s stock goes up and their profit share can be put into the trust. So employees build wealth (in stock and annual profits) as the company succeeds.

Typically, employees need to work about five years at the company before they are fully vested in the stock ownership program. When they leave the company, the stock they have accrued, which is determined by years of service and annual pay, is bought back from them. So far, the highest buy-back amount for a departing employee from CHART, which is a 100-percent, employee-owned ESOP, is $75,000. So the ESOP acts like a retirement plan, except employees never need to put in any contributions.

The end result, says Takaki, is employees see stock statements that clearly demonstrate the benefit to them individually as the company prospers. That translates into a lot of pride and hard work. Takaki says after the company started the ESOP she would hear employees asking even simple things like, “Can we make sure all the lights are off when no one is here?”

Takaki says there are somewhere between 75 and 100 ESOPs in Hawaii. She says the reason more companies are not starting ESOPs is generally due to a lack of understanding of the process. Starting an ESOP takes a lot of paperwork, and hiring consultants and attorneys, particularly in the first year. Depending on the amount of revenue a company generates all that work might not be worth the benefit. Takaki says an ESOP should have no less than 15 people to make it work.

But Takaki says if the program does fit your company, don’t let the paperwork scare you.

“This is the best thing I have ever done,” Takaki says, adding that she believes the ESOP helped the company survive an economic downturn. “Our people took care of our company. Their attitude was just different,” she says. She adds that it was also the right thing to do, particularly for a company that prided itself on its ohana.

“Why not give them a piece of the rock?” Takaki asks.

The Big Payback

Maui Divers of Hawaii Ltd. CEO Bob Taylor is giving Hawaii Business a tour of the company’s galleries and, as he passes each employee, he asks them what they think of the company ESOP. Each question is met with a smile and a gushing of superlatives.

Taylor says in addition to the benefit of the company’s ESOP on productivity, it also helps with recruitment and retention of employees. After five years, employees are fully vested in the Maui Divers ESOP, which gives 35 percent ownership in the company to employees. One employee left with a check of more than $250,000. The ESOP today is worth more than $23 million.

The program was started in 1997, after a group of stockholders asked to liquidate some of their holdings. Taylor says since that time the company has grown by leaps and bounds. Sales have grown from roughly $19 million in 1997 to $73 million in 2006. Then, in this past year, Maui Divers also was selected a “Best Place to Work,” by Hawaii Business, and received a “Best in Business” award from Business Leadership Hawaii. “I don’t think that is a coincidence,” Taylor says.

This year, Maui Divers also won the state’s ESOP of the Year award from the National ESOP Association. Prior to Roberts Hawaii, Maui Divers, a company started in Hawaii in 1958 and No. 122 on our Top 250 list, was the largest ESOP in the state, with more than 700 members. Taylor recommends an ESOP for just about any company, though he warns that an ESOP won’t fix a bad business model. “It will make a good company a very good company,” Taylor says.

As far as drawbacks, he says, he has personally found none. But some business owners are reluctant because it does mean giving up part ownership and it also requires more transparency with employees when it comes to financial reporting. There is also a concern about the financial burden if all employees asked to be paid out at once, what is called repurchasing liability. Taylor says every company faces the issue of stockholder flight, whether they are ESOPs or not.

“We haven’t had any problems,” he says. “I think more companies in Hawaii should be looking at this.”

Family Style

For competitive reasons, Takekawa could not go into detail about how much Roberts’ employee ESOP would be worth. Takekawa says they are securing loans, hopefully from several local banks, and then will begin building the trust. He says it will take about six years to pay off the loan and then the employees will be able to liquidate their stock in a buy-back program.

One critical component of the program, he adds, will be raising awareness of what an ESOP is. He says employees were originally concerned that they would have to contribute to the ESOP, which is not the case.

Takekawa says he would also like to raise awareness of ESOPs in Hawaii’s business community. ESOPs are perfect exit strategies for companies that extol a local value system and have benefited from the hard work and long-term service of local people, he says. Iwamoto, Jr. knows that.

“He is an astute bold businessman, but also has a tough exterior. A typical Japanese male. But he feels for the employees. He knows so many of them by name, he knows their families,” Takekawa says.

An ESOP will let him take care of the people who have taken care of him.

“Robert was able to get some of the value out of the company without compromising the heart and soul of the company,” he says.

Without breaking up the ohana.

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