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How employee ownership lowers inequality, leads to better performance and builds social trust
As I have researched purpose-driven businesses in recent years, I have frequently returned to one conclusion: employee ownership is one of the most important levers we have to overcome economic inequality. I also discuss this in more detail in my forthcoming book: The Profiteers: How Business Privatizes Profit and Socializes Cost.
October is Employee Ownership Month, so I am featuring the recent book Ownership: Reinventing Companies, Capitalism, and Who Owns What by Corey Rosen and John Case as a great overview and argument for employee ownership. Rosen is founder of the National Center for Employee Ownership, a nonprofit that has been supporting the employee ownership community since 1981. Case is a former NCEO board member and veteran author.
While traditional ownership models provide incentives to businesses while contributing to wealth inequality, Corey and John discuss how employee ownership enables people to become owners, not through their savings but through their work, which reduces inequality. Further, data show decisively that companies owned by employees grow faster and provide vastly more wealth to their employees and communities than those not owned by employees. Below are some key points from my article on employee ownership.
Louise Kelso was a lawyer and economist, who essentially invented the employee stock ownership plan, or ESOP. He argued in the 1950’s that there would be more money invested in new capital in the upcoming two or three decades than in all the time before that.
Rosen and Case believe stock markets and public companies need to change to stay productive. Rosen and Case say “public companies as operated today necessarily focus on the very short term to satisfy their investors—who are less like real owners than people betting on short-term movements in stock prices. The number of public companies has shrunk, and many larger companies are choosing to stay private.”
While productivity has risen, growth of median wages have stagnated since 1970s. “All of this (technology and globalization) has put downward pressure on wages because more jobs ore either routinized or subject to downward pressure from the global labor market,” say Rosen and Case. “Workers have been running up a steep hill trying not to fall behind; owners are skiing down it.”
Looking at incentives and obstacles for converting a company to employee ownership helps explain why it has not become the default practice. “First, as good an option it is for many business owners, people advising business owners generally either don’t know about it or, if they do, can make more money persuading the company to sell to another buyer”, say Rosen and Case. “Second, some (although not most) owners want or need all their money up front, and ESOP financing often involves a seller note for part of the deal, delaying the final payoff.”
In practice, employee ownership is suitable to a limited set of companies. Rosen and Case suggest “employee ownership isn’t a good idea for very small companies, those with fewer than 15 or 20 employees. It isn’t a good idea for companies that aren’t showing a healthy profit. It isn’t a good idea for owners who don’t care about their legacy and just want as much cash as possible for their business right now.”
Finally, Rosen and Case believe employee ownership helps reduce the sense of injustice people feel towards the economic system. “First, it would lessen wealth insecurity substantially, ESOP participants have about 3 times the retirement assets of employees in companies with other retirement plans—and 50% of the private sector workforce is in no plan at all,” they say. “Second, ESOP companies tend to be very highly participative in their management style. People work with one another across job titles and functions, learning to trust one another, listen, and work together.”
While outperforming traditional ownership structures on profitability, employee ownership also creates a positive externality by reducing wealth inequality and rebuilding trust. As Rosen and Case suggests, both owners and employees stand to gain from this innovation.