“So much time and so little to do. Wait a minute. Strike that. Reverse it.” Willy Wonka

 

How far employee ownership has come and how much opportunity remains. EO and employee stock ownership plans, or ESOPs, have been my passion for over 35 years, primarily as an advisor to family and private owners. They have also been the lifetime pursuit of my good friend Corey Rosen, founder in 1981 of the National Center for Employee Ownership (NCEO).

To recognize my 100th blog post for Forbes.com, many of which centered primarily on employee ownership, Corey and I explored via a Q&A conversation what we’ve gleaned over the years about ESOPs and EO – and what underlies the challenges, benefits, and prospects.

Question: To say employee ownership has been our passion is an understatement. What’s the No. 1 takeaway?  

Corey: Employee ownership consistently makes life better for employees, for the owners who sell their companies to these plans, and to the communities in which they’re located. It is one of the rare systemwide changes that can profoundly affect the lives of people, and that Democrats and Republicans agree on.

Mary: The power of purpose – namely, how founders and leaders like Corey in the ESOP space and the steadfast, unwavering vision and dedication of so many energized professionals make a difference, one company at a time, in the lives of tens of thousands of workers whom we will never meet.

Question: What two-to-three benefits of employee share ownership persuade an owner that it’s in their interest to enable employees to share in the growth of their business?

Corey: While it’s easy to focus on the substantial tax benefits that selling to an ESOP provides a business owner, most owners first cite their deep satisfaction from seeing the business they built maintain its legacy and values by passing it on to the people who helped build it. For many owners, selling to an ESOP also provides the flexibility to stay involved in the company for however long they choose and in whatever role they prefer.

Mary: I agree: Tax benefits are enticing, but that’s not the “why.”  It’s about the people: the deep pride of continuing a legacy with and for the people who many helped build to company.

Question: While EO exhibits growing momentum, why has it been so slow to expand over the years, with only about 240 ESOPs formed annually between 2015 and 2021?

Corey: Most good ESOP candidates either don’t know what an ESOP is or their advisors haven’t told them about ESOPs or have actually told them they’re not a very good idea. Too often, these advisors prefer owners selling some other way than to an ESOP because it’s more in their financial interest to do so

Mary: The lack of knowledge and understanding of how ESOPs work remains the biggest impediment to growing their number.  All too often, upon learning of an ESOP alternative, an owner will ask, “Why haven’t I heard about this before?” It’s not the right solution for everyone, but it’s a superior solution for the many business owners who, according to our research, don’t have family succession, do have great leadership, proudly value their team and their culture, want to stay private and achieve some founder liquidity, and appreciate that their workers will share in the company’s continued legacy and growth.

Question: An important benefit of employee share ownership is its potential to help employees build wealth. What is the reality?

Corey: The research is absolutely clear that participation in an ESOP increases employee retirement wealth by a factor of two to three times. A 2021 NCEO study of U.S. ESOPs versus comparable companies with retirement plans found that ESOP participants have about twice the value in their ESOP accounts as their counterparts have in their 401(k) accounts. Companies contributed almost all of the money in the ESOP accounts while two-thirds of the money in the 401K plans came from employee deferrals. Add that most ESOP companies also have 401K plan, and it’s clear ESOPs contribute powerfully to employee wealth creation.

Mary: What keeps me up at night?:  Americans are grossly under-saved for retirement.  Epitomizing the issue, the gap has only grown since my Forbes blog from 10 years ago. ESOPs are a proven tool to give access to capital ownership and wealth creation for all workers, mitigating the growing wealth inequality and lack of retirement savings across America.

 Question: What are the next most important benefits of employee share ownership? Where should we place the importance of job quality at ESOPs, the impact on employee retention and workplace culture, and race and gender diversity at ESOPs?

Corey: Research consistently shows dramatically lower layoff rates in employee-owned companies than in comparable companies. Employees in employee-owned companies also have significantly more voice in work-level decisions, which leads to considerably higher levels of employee engagement and job satisfaction. Further, an NCEO study of Census Bureau data finds that ESOP employees of color possess 92% more wealth than those not in ESOPs. These differences also are found if we look at gender and single mothers. That’s because benefits in an ESOP are allocated to all employees based on relative pay or a more equal formula while in 401Ks, employees generally have to put up their own money to gain employer contributions.

Mary: Study after study points to ESOP-owned companies having better performance, engagement, job satisfaction, lower quit rates, etc.  This doesn’t simply reflect an ESOP “magic wand.” It’s the result of combining worker ownership with leadership and culture focused on purpose and opportunity for all.

Question: What specifically would advance the prevalence of employee share ownership? 

Corey: Two states, Washington and Colorado, have programs to spread the word about employee ownership and provide some financing support for feasibility studies. The federal Work Act of 2022 authorizes funding for state programs like this, but Congress hasn’t appropriated money. With a magic wand, I’d get that money appropriated.

Mary: ESOP structures can be very attractive for middle market businesses, but can prove too costly and cumbersome for small businesses and too difficult to balance for larger highly valued companies. Consequently, large cohorts of the American workforce don’t have access to the possibility of participating in the wealth-generating opportunity of employee ownership. Small businesses, however, do have other attractive strategies, such as employee ownership trusts and co-ops. On the private equity front, we welcome initiatives like the nonprofit Ownership Works that provides a path for all workers to participate in the wealth creation of a company throughout its investment horizon.

Question: What are the most encouraging signs that employee ownership in general and ESOPs in particular will multiply ahead?

 Corey: For large businesses, where millions of workers are employed, we have been thinking deeply about strategies that would enable all workers to share in wealth creation.  The new nonprofit Expanding ESOPs coalition is doing groundbreaking work in this area, providing unprecedented hope for broadening the benefits of wealth creation for all workers, improving good jobs, growing retirement wealth, and narrowing the ever-growing wage inequality.

Mary: For nearly two years, I’ve predicted this will be the Decade of the ESOP. The most encouraging trend by far is that more and more ESOP companies are buying other companies. We estimate that about 500 acquisitions are done by ESOP companies each year, accounting for more growth in the number of participants in ESOPs than new ESOPs by a factor of about two-to-one. This trend will continue to accelerate and be the main driver of future growth.

Question: If we hadn’t devoted our careers to EO, what would we likely have pursued?

Corey: I would have tried to be involved in the environment and global warming in particular.

 Mary: If I hadn’t stumbled into the wonderland of employee ownership, I would have pivoted my career to spiritual direction and finding spirituality in all things. Like ESOPs, it’s nondenominational, about finding center and balance, and your heart’s purpose. From hearing former Best Buy CEO and Harvard Business School’s Hubert Joly and reading his The Heart of Business, I realize I’ve had the privilege to do both.