Business Week SEPTEMBER 19, 2005
BW SMALLBIZ -- PEOPLE Peace, Love, & Filters A Vermont filter manufacturer succeeds with its own brand of capitalism Paul Millman doesn't care much for authority, and he's never been one to hide his disdain -- especially during his three years as a salesperson for a microscope filter manufacturer. Irritated by what seemed an overly bureaucratic structure and slow growth, Millman made his frustrations known a little too widely. His employer, Omega Optical, in Brattleboro, Vt., fired him. Millman didn't spend much time licking his wounds. In May, 1991, he and six colleagues founded Chroma Technology to manufacture infrared and ultraviolet microscope filters used by biologists and other scientists. Each of the seven founders got one vote in the running of the company. Each accepted an annual salary of $30,000. Today, the Rockingham (Vt.) company has 71 employees and is principal supplier to the world's three largest microscope manufacturers. The company posted sales of $16.8 million for its fiscal year ended Apr. 30, 2005, an 11% increase over the previous year. Millman says Chroma has been profitable every year since its founding: "It's been an incredible ride." The spirit of egalitarianism upon which Chroma was founded is alive and well. Its structure -- an employee-owned and governed C corporation -- is exceedingly rare, says Newell Lessell, executive director of ICA Group, a Brookline (Mass.) consulting company specializing in employee-owned companies. "There are so few businesses like Chroma they're not even tracked," he says. Every employee, including Millman, draws an annual wage between $37,500 and $75,000, based on seniority and experience. Everyone's salary is public knowledge. A semiannual bonus, equal for all employees, averages about $13,500. Chroma offers health benefits and a 401(k) with a 15% company contribution. Every year, every employee receives 200 shares of company stock, valued at $60 each as of August, 2004. Employees may cash out up to 25% of their stake at any time without penalty. Equally unusual is Chroma's management structure. The company is currently run by no fewer than seven committees. They're overseen by an eight-member board that includes five of the co-founders. "We try not to micromanage the company," says board member, co-founder, and President Richard Stewart. "The whole thing is an experiment." An experiment that has had its share of growing pains. The first real breaking point came in 2000, when a clash over relocation led Chroma to formalize its chain of command and reward all employees with a stake in the company. Since then, consolidation in the telecommunications industry has pushed large suppliers of fiber-optic filters, such as Corning () and JDS Uniphase (), into Chroma's niche; smaller companies have moved in as well. Through it all, Millman and his comrades have pressed on, rethinking Chroma's structure and its management. "As Chroma scales up, it will see more tensions between ideals and realities, so they will continue to reinvent their governance," says Lessell. "They're smart people." Millman came upon his worldview early. "My parents were Communists. That shaped me," says the Brooklyn (N.Y.) native. He earned his B.A. in 1969 at New York's New School for Social Research and logged two years as a grade school teacher and at least 10 more as a bartender. He started an alternative newspaper, Rat, and even interviewed John Lennon and Yoko Ono during their infamous bed-in for peace. In 1988, Millman, visiting his brother in Brattleboro, decided to call Vermont home. "I saw people walking up and down the streets wearing sandals, and I thought, 'This is the place for me,"' he says. He soon found a job at Omega Optical, where he met his partner, Wendy Cross, and Stewart, who would later leave Omega to protest Millman's firing. The co-founders raised $235,000 from family and friends and rented space in Cotton Mill Hill, a Brattleboro business incubator, bringing a product to market five months later. That first year, sales hit $314,200. Over the course of the next decade, Chroma landed the biggest names in the microscope and telescope industry as customers, including Nikon and Olympus, both based in Tokyo, and Carl Zeiss in Oberkochen, Germany. Meanwhile, the company wrestled over different forms of decision-making. "We went through various iterations from 1991 to 2000," says Millman. Chroma tried town hall meetings, "but that was a real problem," recalls Millman. "People were making decisions as individuals without accountability to anyone else." Those meetings were the site of Chroma's toughest test to date. In 2000, the company was on "the verge of a civil war," Millman says, over a solicitation by New Hampshire, which has no personal income tax, to relocate the company within its borders. Many of Chroma's 50 employees wanted to go; Millman and five other founders, reluctant to move their families, wanted to stay put. Each employee had one equal vote -- or so it seemed. But the founders didn't want to follow majority rule. Says Gabe Capy, a 43-year-old shipping and receiving manager who joined Chroma in 1996: "We imagined we were democratic, but when it came down to it, the same people were making all the decisions." With Chroma at an impasse, Millman called in ica. After much negotiation, the employees agreed to stay in Vermont in return for some changes. Chroma replaced its one-vote-per-employee rule with a one-vote-per-share policy, effectively giving the founders more power. But because each employee now receives 200 shares for each year of service, the founders' power is diluted with each new hire. Chroma's non-founding employees now own slightly more than 50% of the company. In addition, the board of directors, which had gone years without meeting, was given more authority and required to convene twice a year. The board appointed employees to three committees -- an executive committee, a personnel committee, and a coordinating committee -- that would handle most decisions. That proved not to be the final answer, either. The original coordinating committee was replaced in late 2003 by a six-member steering committee that manages key activities, including production. Today, the steering committee and five other employee committees make operating and budget decisions. They report to an executive committee -- including Millman, Chief Financial Officer John Simard, and Jan Meier, an engineer -- that consults with the board on the most important decisions, such as potential acquisitions. But Millman maintains that most questions are settled long before they reach committees designed to address them. "Ninety-five percent of decisions are made on the shop floor," he says. Tellingly, only seven workers have resigned since the company began. Chroma's success in retaining employees is particularly notable given its pay scale. Michael Stanley, a PhD and senior application scientist, took a sizable pay cut when he joined Chroma eight years ago. "Someone with my experience might make $180,000 elsewhere," says the 51-year-old. "But I live in a log home that has two streams, a pond, a sugar shack, and a cycle shack for my Harley." Of course, not everyone wants a cycle shack. Anne Neumeyr-Heidenthal, a molecular and cell biologist, joined Chroma in January, 2005, largely because of its reputation. Neumeyr-Heidenthal, like all of Chroma's scientists, not only develops products but educates customers -- mostly biologists -- about them. At Chroma, she says, "I can keep my integrity as a scientist. I can give other scientists the best advice," even if it means they might buy another company's product. If, as some employees maintain, Chroma's commitment to consensus sometimes slows down decision-making, neither revenues nor creativity seem to have suffered. Chroma is stepping up its research and development efforts. The company has fast-tracked a new line of hard-coated filters that block particular wavelengths and allow up to 97% of the others to pass through, compared with the usual 80% to 90%. "That might not seem like a big difference," says Millman. "but it is when you're looking at small things like dna strands." Now, Millman is looking for more growth overseas. About 34% of Chroma's sales currently come from abroad. In May, Millman visited the offices of Motic China Group, a microscope maker and customer in Xiamen, China. Millman is considering opening sales-support offices in Germany and China -- and discovering just how well Chroma's experiment translates from the People's Republic of Vermont to the People's Republic of China. By Kevin Ferguson Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901
