Publicly owned and family-run

The Koss family has learned to adjust to added costs and stringent regulations over the more than 40 years that its stereophone company has been listed on Nasdaq.

By Deanne Stone

The Koss Corporation has been a public company for more than 40 years, yet many of its customers still think it’s a privately held family business. That’s an easy mistake to make; the business carries the family name and is family-run. As it happened, Koss Corporation—a leading designer and manufacturer of stereophones and related accessory products that’s headquartered in Milwaukee—became a public company more by chance than intention.

John Koss started the Koss Corporation as a hospital television rental business in 1953. But his real love was music; he was a trumpeter who had played with big bands and was always searching for new ways to improve the audio quality of the music he listened to at home. He and an audio engineer friend developed a phonograph with winged speakers that had a switch for listening to music through headphones. When they introduced it at a hi-fi exhibition, the headphones, intended to highlight the phonograph, captivated the audience.

Quick to recognize a business opportunity, Koss returned to his basement workroom to tinker with the headphones, making sure they provided full amplitude for high and low tones. After testing his invention on music buddies like Bobby Hackett, Dizzy Gillespie and Mel Tormé when they came through town, Koss launched his new product with the slogan, “Hearing is believing,” and secured an endorsement from singer Tony Bennett. The company’s ad, “Tony Bennett likes Koss stereophones, and you will, too,” caught the attention of music lovers. Koss’s business took off, igniting the personal-listening industry.

“We had to educate the public about stereophones,” says Koss, now 77 and chairman of the board, “because they associated them with headphones used for communication during World War II. Those devices had a thin sound and a lot of static, which is why we avoided using the word ‘headphones.’”

The growing demand for stereophones encouraged Koss to expand his business. In the 1960s, he bought several small companies, among them Rec-o-kut, a public company in New York that had fallen into bankruptcy. After running it as a separate entity for a year, Koss merged it with Koss Corporation in 1966. He kept Rec-o-kut’s listing on Nasdaq and changed its trading name to Koss.

“I would like to have been around then to discuss that decision with my dad,” says his oldest son Michael, 53, now Koss’s president and CEO. “For a company our size, being public is not worth the trouble, frustration, and exposure.”

John Koss sees it more as a mixed bag. “Michael’s right from the product standpoint,” John says, “but at the time going public helped us financially and imposed good corprorate discipline. And from a personal standpoint, it was very good for estate planning.”

Michael’s complaints don’t surprise Howard Neiman, a CPA and partner with Babush, Neiman, Kornman and Johnson, an Atlanta tax-consulting service for family businesses and closely held companies. “A lot of small companies regret the decision to go public, especially now with the added burdens and costs of complying with Sarbanes-Oxley,” says Neiman, who is a Family Firm Institute fellow. “Many are going private, and larger U.S. companies that want to go public are petitioning to do it overseas. ”

The Sarbanes-Oxley legislation, intended to curb the accounting shenanigans that got Enron into trouble, is especially galling to the Kosses, who pride themselves on being good stewards of their company. “We’ve always complied with government regulations,” says Michael, “so it’s annoying having to deal with this extra layer of bureaucracy. Small companies like ours are spending hours in auditing committees that would be better spent on strategic planning.”

For the Koss Corporation, a single-product company, there is another disadvantage to being public. Koss’s disclosure reports, unlike those issued by companies that manufacture multiple products, reveal more about the firm’s operations than the family would prefer. “Our competitors can easily get information about our product and figure out what they need to know,” says John Jr., 50, vice president of sales. “Information that they used to have to dig for is now readily available on the Internet.”

Public transparency goes beyond the company’s profit-and-loss sheet. The salaries and compensation packages of family members are also published annually for all to see and comment on. “If you’re not comfortable in the spotlight, this is not where you want to be,” says Michael. “You have to have a thick skin and be prepared to have your dirty laundry aired.”

The Kosses experienced firsthand the embarrassment of having their dirty laundry flutter in the wind back in 1984, when the company was forced into Chapter 11. Like many ambitious entrepreneurs, John Koss first tried expanding his product line in the mid-’60s by adding turntables, electronics and phones. When that didn’t work out, he returned to manufacturing stereophones. By the mid-’70s, he could no longer ignore the competition from the Japanese. He hired an outside manager who had worked for a larger corporation to guide the company forward.

Over the course of the next eight years, he hired and fired three presidents. All had encouraged him to expand the product line with lower-priced items like tape recorders and a portable radio, the Koss Music Box, and all underestimated the competition from Japan. The company’s sluggish Taiwanese supplier couldn’t keep pace with Koss’s Japanese competitors, and by the end of the year the company was teetering on the edge.

“I’m an innovator, an ideas guy,” says Koss. “A president is the operational guy. I brought in outsiders because the company was getting bigger, and I thought they could do a better job of growing the business than I could. It didn’t work out that way.”

Koss returned to the helm and refocused the company on what it did best, manufacturing stereophones. But by then, his creditors had lost confidence in Koss’s ability to withstand the onslaught from Asian competitors. In 1984, the company filed for reorganization. Michael, who had been living in London and building Koss’s European market, returned to Milwaukee, working first as manager of advertising and public relations and then as vice president of marketing. After the reorganization, Michael was promoted to vice president of Koss Corporation and put in charge of operations and finance.

Drawing on his company’s reputation for high-quality stereophones, John Koss worked ferociously to expand its dealer base. Against all odds, within one year he had lined up enough outlets to pay lenders two-thirds of the $14 million he owed. Since 1985, the company has turned a profit every year. In 2006, Koss had its best year ever, racking up sales of close to $51 million.

Michael says that his father, an artist and intuitive thinker, lost his footing when he tried to follow conventional business wisdom and practices. The company got back on track when his father was forced to think creatively. “When the Japanese manufacturers came out with $14.95 stereos, my father met the competition with $50 stereophones that set a new standard in the industry and put Koss on the map,” Michael says. “Now the high-end stereophones are the mainstay of our growing European market.”

The brief but painful stint in Chapter 11 taught the Kosses to run a tight ship. Michael, who became president and CEO in 1991, says he enjoys running the operational side of the business more than his father did. “We run many parts of the business as if we’re still in reorganization,” he says. “I keep a close eye on the monthly cash flow because it’s easy to get into a hole.” His father, too, likes the discipline of holding mandatory board meetings that’s imposed on public companies. “We’ve always had top people on our board,” says John Koss, “and we’ve benefited from their counsel.”

Not all founders are as accepting of the constraints placed on a public company as John Koss, says family business adviser Howard Neiman. “Founders who are used to running their companies or who like to make quick decisions,” Neiman says, “don’t want to report to a board or to shareholders. Going public can be a difficult adjustment for founders used to calling the shots.”

Having a publicly traded company may confer prestige, but Neiman says that family businesses can have most of the advantages of being public without the restrictions, costs and loss of privacy. “I advise family business to act as if they were public,” he says. Families can put structures such as formal or advisory boards in place and hold quarterly board meetings to keep family shareholders informed as well as ensure good financial reporting, compensation plans and rules of entry for working in the business. And as for the supposed advantages of raising capital on the open market, Neiman says, “It can be a lot cheaper for a family business to borrow money and pay a fixed rate than to take on all the additional costs of maintaining a public company.” John Koss raised $1 million in a secondary offer only once and never turned to the public for money again.

After more than 40 years as a public company, the Kosses are not about to go through the expense of becoming private. Koss is owned and controlled by the shareholders, most of whom are family members. The family owns about 60% of the stock—John Koss holds the lion’s share, and about 14% is held by employees through the employee stock ownership trust—so the Kosses have a big personal stake in the long-term health of the company.

By all accounts, the Kosses are a close-knit family. The whole clan rendezvoused recently in Florida to celebrate matriarch Nancy Koss’s 75th birthday. Michael and John Jr. say they are content in their respective niches in the company. Although the second generation is currently in charge, family members say they are not wedded to bringing the third generation on board when they come of age. Says John Koss of his 15 grandchildren, ages ten to 25, “If they’re competent and interested in working in the business, great, but it’s up to my sons, not me, who will succeed them.”

John Koss’s three daughters don’t work in the company, but they do own shares of stock. Koss set up a voting trust as part of his estate plan and, in this respect, he sees advantages to being a public company. “I give shares to my grandkids to use to pay their college tuition,” he says. “When they’re ready to sell, we don’t have to pay to evaluate the value of the shares because the stock market does that for us. The same goes for any shareholders who want to sell their shares. They offer them first to the voting trust, and if we can afford to buy them, we do.”

In families who don’t get along as well as the Kosses, says consultant Howard Neiman, disgruntled relatives may want to sell off their shares for as much as they can. This can threaten the viability of a family-controlled public company, he notes. “There is an inherent conflict between two classes of shareholders,” he says, “those active in the business who are well compensated and the non-active who may not be living as well. Most businesses prefer to pay out less in dividends and invest the profits in the company, whereas non-active shareholders want bigger dividends. Many public companies have been forced to sell to liquidate funds to pay off shareholders.”

The Kosses are fortunate to have been spared family infighting; they have enough on their hands staying ahead in an increasingly tough, competitive industry rife with violations of intellectual property rights, while also grappling with shorter product cycles and rising energy costs. Running a small public company that has thinly traded stock, Michael says he is cognizant of shareholders’ concerns, but his planning is not driven by quarterly earning reports. For the past 20 years, the company has followed a long-term strategy of making decisions in the best interest of the company, and that has worked out well for the shareholders and the family, the Kosses say.

“Every morning when my wife and I wake up,” says John Koss, “we are thankful for this business and what it’s provided for our family.”

Deanne Stone is a business writer based in Berkeley, Calif.