My Struggle with Wall Street

“Many of the most important practices at this company exist in large part because Wall Street and the banks have applied so much pressure. If the financial community had gone easier on us, we might not be where we are today.”


As part of their training, up-and-coming leaders in our company read some of history’s great thinkers, from Aristotle to Martin Luther King Jr. To that list I’m tempted to add Nietzsche, who said, “That which does not kill me makes me stronger.” It’s an apt way to describe some of our encounters with the banks and money managers that have financed our growth over the years. Every so often, no matter how unwittingly, they seem to want to kill us. But we’ve always emerged stronger than when we went in.


We’ve built a successful company around a well-defined business opportunity: delivering supplies and equipment to doctors with unrivaled speed and great service. We started Physician Sales & Service (PSS) in 1983 and had revenues of less than $2 million our first year. Since then we’ve grown at an average annual rate of nearly 50%. Today we have 2,400 employees, with annual revenues projected at $700 million. We went public in 1994 at $3.67 per share. Our stock has traded as high as $33 per share. We are, to be direct, the fastest-growing company in the history of our industry.

None of this would have happened without our commitment to sharing the wealth with our people. Nearly every PSS employee has stock in the company; as a group, employees control 30% of the equity. And meaningful ownership is not limited to the top. One of our truck drivers, a young fellow who’s been with the company from the early days, owns stock worth $850,000. He’s done well — but others have done even better. Depending on our stock price, we have 150 to 200 millionaires working at PSS.

It’s a pretty basic concept: if you’re prepared to do whatever it takes to satisfy your customers, and you’re willing to extend the benefits of success to your people, you can achieve extraordinary results. I get the concept. Our customers get the concept. More than a few Wall Street money managers get it — and have earned fabulous profits as a result. But lots of bankers and money managers don’t seem to get it — no matter how hard we try to explain things.

Last year, at our annual meeting, we had to reauthorize the stock-option plan we use to reward employees for outstanding performance. It’s a critical feature of what makes this company work. Our institutional investors voted to approve the plan but it was an amazingly close call. It passed with only 53% of the vote!

Here’s the strange part. I welcome this skepticism. It’s been healthy. Many of the most important practices at this company exist in large part because Wall Street and the banks have applied so much pressure. If the financial community had gone easier on us, we might not be where we are today.

That’s been true right from the beginning. We never set out to be an employee-owned company; our banks forced us into it. Early on, as our business (and thus our credit
demands) kept expanding, banks kept turning us down for loans. Finally, when the one bank that would still lend us money called our loan, we knew we had to raise more equity. So why not raise it from our own people?


Our employees (21 people at the time) kicked in as much capital as they could and the company secured more credit. You could feel the energy that employee ownership unleashed. So we introduced an ESOP in 1986. Since then we’ve set aside millions of shares for a range of incentive plans. The end result is what we have today: an organization where everyone has a piece of the action.

Going public was our second big encounter with the world of finance, and another source of productive pressure. As soon as our shares started trading, we got familiar with Wall Street’s intense performance logic. Sometimes, though, we wondered if it used any logic at all. Last quarter we reported great results: earnings up 57% from the year before — better than every projection. How did the money managers react? Our shares dropped by 30% in three days. Try explaining that to 2,400 employee-owners: They post record results, beat what the Street expects, and still lose 30% of their market value!

But Wall Street’s performance scrutiny (and eccentricities) have reinforced our long-term commitment to accountability. We make a simple promise at PSS: we always hit our numbers. Nothing stands in our way not even blizzards. Last winter’s punishing snowstorms in the Northeast cost us nine selling days — a big hit against the quarterly plan. But Wall Street forecasts don’t change with the weather. So in March our people staged the most remarkable selling campaign I’ve ever seen. PSS had its best month in history — and made the numbers.

Pressure from bankers and money managers has had another positive impact: it’s helped make us a company of business people. Bankers expect a company’s CEO to speak knowledgeably on any business issue — sales projections, cost estimates, the financial condition of key customers. That’s our philosophy too, but it applies to everyone. We don’t hire salespeople or truck drivers or computer specialists. We hire CEOs — people who want to develop a broad-based knowledge of the business and who are prepared to act on that knowledge.

But CEOs are made, not born. This year we’ll invest $3 million to educate our people in business fundamentals. New salespeople spend 14 weeks in training, including a full week at PSS University learning the economics of the health-care business. Leaders-in-training will read Plato’s “Allegory of the Cave,” which captures the image of leaders as facilitators, and Dostoyevsky’s “The Brothers Karamazov,” which depicts management by fear and intimidation.

But business education is not a one-time event. It’s an all-the-time discipline. One of our programs — PSS Challenge — keeps people immersed in the business. Once a month employees convene to review the company’s P&L statement and stay current on various operations. Attendance isn’t mandatory — but we use an interesting technique to keep it high. At the beginning of the year we set aside $1 million worth of stock. Then we announce that we’ll divide those shares evenly among all the employees who attend 10 of that year’s 12 PSS Challenge meetings. If a thousand people attend 10 sessions, they each get $1,000 worth of stock. If only one person makes 10 meetings we’ve created another millionaire.


That’s why I’m grateful Wall Street and the banks have given us a hard time. It’s pushed us to performance levels we wouldn’t have reached otherwise. Even today, when we’re flush with success, I never forget those early encounters.

A few years ago we held a company party in my backyard. Things were going well at PSS — so well, in fact, that we no longer had to do business with a bank that had twice cut off our credit. We wanted to commemorate our freedom. We gathered all the gizmos this bank had given us — coffee cups, golf balls, calendars, stationary — along with all the contracts and loan agreements we’d signed. We put them in a casket, placed the casket in the ground, erected a headstone, and held a proper funeral.

During the ceremony one of our people asked why we didn’t bury the casket at sea. “I’d love to do that,” I responded, “but I’m a realist. You never know when I might have to dig up that casket and kiss that bank’s ass again.”

Patrick C. Kelly is Chairman and CEO of Physician Sales & Service, Inc. (PSS), based in Jacksonville, Florida.