An American Story
by John Case
An immigrant’s son. Serial entrepreneurship. A grandson’s vision and a family’s bold decision. Somehow it all led to a thriving employee-owned company that has become a regional institution
James Timothy O’Connell was not going to take Latin. That was final. The year was 1903, and the boy was just 14. But he told his family, immigrants from Ireland, that if the priests and the nuns were going to make him study Latin he would quit school. His parents remonstrated with him, to no effect. Leaving school, J.T. set out to become a commercial fisherman.
Newport, Rhode Island, was then the storied home of Gilded Age wealth. The Vanderbilts, the Astors, and others had built their immense “cottages” out along Bellevue Avenue. Down near the waterfront, where a lot of Irish immigrants lived, life was grittier. J.T.’s father ran a bar out of the first floor of the family home. The boy headed out into Narragansett Bay in a sailboat every day, alone or with a crewman, bringing back fish and lobster.
J.T. was a hard worker. He did well. He saved his money. He also noticed a few things. If he salted his catch, he could sell it for a little more in the winter. If he bought his equipment and supplies in bulk, direct from the manufacturers, he could get them cheaper. First he bought copper paint. Then rope. He ordered the material in large lots, storing it in a room behind the bar. He’d sell what he didn’t need to other fishermen.
In 1907, his father died. Now the young man was his family’s sole source of support. He closed the bar and made the space into a ship chandlery, J.T. O’Connell & Company, selling marine supplies. A visiting salesman from Boston stopped by and asked to see the boss. “I’m it,” said O’Connell. He was 18.
If entrepreneurs are born, not made, then O’Connell had the genes. Over the next few decades he expanded the chandlery into lumber and building supplies. He launched a company to bring oil and gasoline up from New York City to fuel Newport’s new bus fleet, along with the growing number of gas-powered automobiles and oil-fired furnaces. He bought real estate on Newport’s waterfront, eventually including a 30-acre estate out on Castle Hill, a few miles away, which had belonged to the son of the naturalist Louis Agassiz.
And then there was the United States Navy, which had a significant presence in Newport and whose steady purchases helped O’Connell weather the Depression. In the late 1930s, he got wind of a massive navy auction at the Brooklyn Naval Shipyard—big winches, bumpers, all kinds of nautical supplies and equipment. He took the train to New York and was amazed to see that he could pick up most of the stuff for pennies on the dollar. He called his bank for a line of credit. He called the New York, New Haven and Hartford railroad to arrange for boxcars. He called his associates in Newport to line up warehouse space. He sold the items steadily but still had plenty left in 1940.
That year, the winds of war were blowing. The navy began expanding. Now it needed a lot of the material back, and price was no object. It was a crisis of conscience for O’Connell: how much should he charge? He consulted with the parish priest. Together they decided that he would figure out his costs and apply his usual business markup. It was an ethical decision—and a smart business move. Navy purchasing agents realized this was a man they could trust. As the war heated up they gave him a series of no-bid contracts.
By the time J.T. O’Connell died, in 1974, his obituary read like a Newport business directory. Oil and coal. Hardware and building supplies. Banking. Real estate. He was a member or director of more than a dozen boards and associations. The obit called him a “business institution in Newport.” The one thing that he wasn’t, says his grandson Tim O’Reilly, was a delegator. Like a lot of entrepreneurs, he had left no obvious successor, and it wasn’t clear what would become of the businesses he had built up. His three daughters and other family members were the board of directors; they hired managers to run the various operations. But finally they put in a call to Tim, the eldest of J.T.’s 26 grandchildren.
O’Reilly had grown up in Newport. He attended college at Notre Dame, graduating in 1961. He served on navy destroyers; he earned an MBA from Dartmouth’s Tuck School. For some years he had been working for Gladstone Associates, an economic consulting firm, in Washington D.C. He wasn’t sure he wanted to return to Newport, let alone run his grandfather’s ventures. “But when your family says they need you, it’s hard to say no,” he says now. He joined the company in 1976 as president.
It wasn’t an easy situation. Tim would have to learn the businesses. The navy was scaling back, moving or closing some of its facilities. It was the 1970s, not a great time to be running any sort of business. Inflation was high. The price of oil was skyrocketing. The Rhode Island economy was rocky. Over time, of course, inflation abated and the economy recovered. Even so, the O’Connell oil business began hitting some strong headwinds. It had come to focus on home oil delivery, and it had built its reputation on reliable service. But newer burners didn’t break down as often. Discounters were undercutting its prices.
And then there was the labor situation. Tim arrived in the midst of an organizing strike in the building supplies business, led by the Retail Clerks union. The Teamsters were trying to organize oil drivers in the region. There was grumbling, animosity, a lack of trust between workers and bosses in both businesses—a microcosm of American labor relations at the time. “I didn’t want to spend my time fighting with my employees,” says O’Reilly. He began to explore profit-sharing. “I wanted to get everyone on the same page, working toward the same goal.”
Somehow, O’Reilly managed to keep things going. As he did, he began to develop a vision of what the company could become.
This wasn’t just any old place, he realized. This was Newport. The city had a strikingly beautiful location overlooking Narragansett Bay and the Atlantic Ocean beyond. It was still a magnet for the rich and well connected. It was a sailing center. It was close to Boston and not too far from New York. It boasted street after street of beautiful colonial-era buildings. Surely tourism was its future. His company—by then rechristened the Newport Harbor Corporation (NHC)—owned valuable properties along the city’s waterfront. Plus there was that big estate out on Castle Hill, whose main building had been leased out as an inn.
He went to work slowly. In 1980, the company created the Newport Yachting Center, which included a marina and the renowned Newport Sailboat Show. In 1981, it opened its first restaurant, renovating a waterfront bar called The Mooring and turning it into an upscale eatery with stunning harbor views. For the next 14 years O’Reilly would look into development opportunities while maintaining the company’s existing businesses. He considered developing the Castle Hill property but couldn’t get the necessary zoning variance. He tried selling the property but couldn’t find a buyer willing to pay what he thought it was worth.
He also had to confront the age-old problem of family businesses: what to do about ownership. The building supplies business by then had 36 shareholders, all of them his relatives. The oil business had more than twice as many, including the heirs of J.T. O’Connell’s original partners. Some members of both groups were getting older; they wanted liquidity. Others were third generation, in their twenties and thirties, with little interest in the business—they just wanted out. One of O’Reilly’s cousins was interested in buying the building supplies business, but he didn’t yet have the money.
In retrospect, the fateful year was 1995. A big Connecticut oil distributor was buying up local and regional companies, hoping to consolidate a leading position in New England. It offered cash on the barrel for O’Reilly’s oil company, an offer he and his board decided to accept. Meanwhile, the innkeeper’s lease on the Castle Hill property was up. Newport was reviving, and the beautiful location looked like a prime spot for a newly renovated luxury inn and restaurant.
By then, too, O’Reilly had attended a conference of the ESOP Association and learned about something called an employee stock ownership plan. An ESOP, he saw, would be an ideal vehicle for providing the shareholders with liquidity and for getting employees and management on the same page. Not everyone in the family agreed with the idea right away, but most did. That year, O’Reilly sold 32% of the company to Newport Harbor Corporation’s newly created ESOP.
In Bob Dylan’s words: the stone it was turned, the die it was cast. The oil business was gone. O’Reilly’s cousin would buy the building supplies business. NHC’s future would be in hospitality. And it would someday be a company wholly owned by its employees. “We were always aiming at 100%,” says O’Reilly.
Today, you might be taking a walk along Newport’s picturesque southwestern coast, out by the Castle Hill Lighthouse. And you might come across the Castle Hill Inn, which has indeed become a world-renowned luxury hotel and high-end restaurant. The Stars and Stripes flies on the big flagpole right outside the inn. Right next to it is the blue-and-white ESOP flag, a sign that there could be something a little different about this company.
Different it may be—but no one should overlook the similarities between Newport Harbor Corporation and the countless other family enterprises sprinkled all over the United States. There was that matter of buying out the shareholders, for example. And there was the often-vexed issue of succession. As Tim grew older, he didn’t want to make the same mistake that his grandfather had, running the business until the day he died with no one ready to take over.
Tim’s son, Paul O’Reilly, had graduated from St. Michael’s College in Vermont in 1988 and took a job in IT sales. But he had worked summers at NHC’s marina, and the executive responsible for the marina wanted to offer him the manager’s job. Tim demurred: company policy said that no family members could be hired into management positions unless they had managerial experience elsewhere. The executive chastised him: if he wasn’t your son, you’d let me hire whoever I wanted to. You’re practicing reverse nepotism.
So Paul came on board and worked his way up. He served as sales manager of the oil company until it was sold. He managed Castle Hill. He directed NHC’s marketing efforts. Eventually he became executive vice-president and then, in 2006, CEO. He was a driving force behind the company’s move into restaurants. And he bought wholeheartedly into the idea represented by the ESOP. “Members of [Paul] O’Reilly’s management team say he infused the company with a set of values that are both pragmatic and idealistic,” wrote journalist Brian C. Jones in a 2012 profile of the company. The values are “described in four principles: ‘Employees rule. Customers guide us. Profits matter. Do the right thing.’” The principles appear to this day on the company’s website, accompanied by a famous quote from Mark Twain: “Always do the right thing; this will gratify some people and astonish the rest.”
Principles, of course, don’t fund a payroll. And Tim, Paul, and everyone else in the company were learning the restaurant business on the fly. The company opened 22 Bowen’s Wine Bar and Grille in 2001. It launched 22 Portside in 2002 and the Boathouse, in nearby Tiverton, in 2005. There would be others to come, in Providence and elsewhere, including the 2012 purchase of a small chain of Italian restaurants in Massachusetts known as Papa Razzi. But it was a slog. “We grew too fast,” says Paul. “We made a lot of mistakes. It was trial and error. It took years to get [some of the restaurants] profitable.”
Eventually the profits did come. Along with them came the ESOP. Funded by company cash—not by debt—the plan acquired more and more shares, finally reaching 100% in 2018. The acquisition of Papa Razzi, moreover, increased the size of the company by about a third and forced it to develop managerial capabilities that it had lacked. “It was everything,” Paul says. “HR, accounting, IT, sales and marketing, the oversight of restaurants. Now we’re scaled up and ready to take on a regional role.”
Scaled up, indeed. The company last year did $82 million in sales. It employs about 1,200, including roughly 800 full-timers. Any employee who works more than 800 hours is eligible for the ESOP. Numerous veteran employees, including front-line workers, have substantial balances in their retirement accounts. Turnover is estimated at 14%, a fraction of the average for the restaurant business. The company is “investing locally, and building community wealth, rather than sending those dollars to absentee shareholders,” wrote Karen Kahn in a recent article on the company.
It has been a long road from J.T. O’Connell’s Latin aversion to today’s Newport Harbor Corporation—which, by the way, is opening another new restaurant in June 2019. But it’s a quintessentially American saga, with an egalitarian twist. The entrepreneurship, the family business, the pivot to a new industry, the ESOP, the principles enunciated and implemented by Tim and Paul O’Reilly— all augur a strong future for the company. It’s a business that shows the potential for a well-managed family enterprise—and for employee ownership.