Can Employee Ownership Save Capitalism?

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.

So I was excited to see the new book Ownership: Reinventing Companies, Capitalism, and Who Owns What by Corey Rosen and John Case. 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.

In talking to the authors, they highlighted the contrast between employee owned companies and the traditional model of economic growth. The traditional model, they point out, “has divided labor and capital. The providers of capital get well rewarded when their investments pay off, and absorb the risk if they don’t. Everyone else relies on their wages and what they can save. Inequality is built into this model—and some inequality may even be necessary, to provide incentives for risk taking.”

This is an incredibly important point. While there are many ways that businesses can be sustainable and socially responsible, companies organized with traditional ownership structures (e.g. publicly traded, VC/PE owned, family owned, LLCs) will systemically funnel a disproportionate amount of the gains to such owners and so will only increase the economic inequality that plagues our world. So, while their products may be environmentally friendly and produced in ethical ways, at the end of the day, companies with traditional ownership structureswill also be contributing to an increase in economic inequality.

But Corey and John argue that “there’s another model that eliminates that problem entirely. Once a company has been established, employee ownership enables people to become owners, not through their savings (which with wages stagnant in real dollars since the 1970s are rarely enough to accumulate substantial ownership) but through their work. Companies share ownership with employees as a benefit and employees earn it though greater commitment, and through contributing ideas to help their companies grow. In fact, the 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.”

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I am grateful to the many leaders at employee-owned companies over the years that I have interviewed, such as at Global Prairie, Fireclay Tile and King Arthur Flour, and also to Greg Graves, retired Chair/CEO of engineering firm Burns & McDonnell, who wrote Create Amazing: Turning Your Employees into Owners for Explosive Growth.

Below are some more details from my discussion with Corey and John on why they believe employee ownership is an important model for equitable and sustainable economic development.

Christopher Marquis: I really enjoyed your book and how in the chapter you compare Walmart and Publix, which is 80% owned by current and former employees. Both are very successful companies with loyal shoppers. What would Walmart look like if it were employee owned? And what would Publix look like if Walmart bought it? Who would win, who would lose, and who should public policy support?

Corey Rosen and John Case: If Walmart employees had the same kind of ownership that Publix employees do, the Walton family would still be quite wealthy, but the employees at Walmart would be too. Rather than all that wealth—more than the GNP of most countries—going to one family, it would be shared more broadly, leading to stronger communities and more economically secure workforces. We might even see more of the kind of love for the company that Publix customers and employees are famous for.

Marquis: Traditionally, it has been public ownership of stock that financed corporate growth. If this did did not exist, what would the implications be for business?

Rosen and Case: Public stock markets still serve important functions. They provide a place for people to invest their 401(k) plans in a diverse equity portfolio; they provide a way for companies to attract new capital (although this is far less common than most people assume); and, because of securities laws, provide a way for regulators to insist on at least some level of transparency.

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But 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. All these companies, public and private alike, would be much stronger if they shared ownership with employees widely and in large enough amounts to create a standing interest in the long term.

Marquis: Productivity has gone up much faster than wages, as Louis Kelso anticipated. That was never true before—why has it been true in the last few decades?

Rosen and Case: Kelso was the 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. Kelso did not (and could not) anticipate the accelerating role that technology plays or the disruptions to the labor market from globalization.

All of this has put downward pressure on wages because more jobs ore either routinized or subject to downward pressure from the global labor market. Productivity has risen pretty steadily, but real median wages for most people have been about the same since the 1970’s. Meanwhile, real returns to capital have grown over 8% per year. Workers have been running up a steep hill trying not to fall behind; owners are skiing down it.

Marquis: Classical economics tells us that if something makes a company more competitive, then the market will favor companies that adopt that practice. So why doesn’t every company become employee owned?

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Rosen and Case: If only we were all as rational as classical economics assumes! But aside from that, you have to look at the incentives and obstacles for converting a company to employee ownership. First, as good an option it is for many business owners—and there is no more tax-efficient, legacy-preserving way to do a business transition—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. 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. There are proposals now in Congress to try to ease that situation.

Marquis: Imagine you are an advisor to a company looking to sell. Why might you tell them an ESOP is not a good idea?

Rosen and Case: It 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. Otherwise, we believe that sale to an ESOP is almost always a good idea.

Marquis: People see the economy as increasingly unfair, and that seems to be fueling social distrust and anger. How would employee ownership help?

Rosen and Case: Two ways. 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. Insecurity breeds fear and distrust. 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. That helps to build social trust.

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