Looking Past the Pandemic: ESOPs, Employee Ownership Companies Set to Outperform in Anticipated 2021 Recovery
What’s the new year’s outlook for ESOPs and companies with substantial employee ownership? While COVID-19 makes the crystal ball unusually murky, economists and indicators we follow suggest these companies should fare better than other businesses, both in their operating and financial results as well as in merger and acquisition activity.
In general, leading economists expect U.S. economic growth to stumble early this year before reaching pre-virus levels in the second half. Much depends on the pace of the COVID-19 vaccine distribution. Given that it already is progressing more slowly than planned, economic growth may be weaker than many initially projected.
Diane Swonk, Grant Thornton’s astute chief economist, thinks speed bumps in vaccine distribution could delay achieving herd immunity until year-end, meaning “the economy won’t reach its previous peak until early 2022.” But if those hindrances are relatively minor, Ms. Swonk believes the U.S. could attain its previous peak during the fourth quarter and rebound by 3.4% for all of 2021, which would be its strongest pace in 15 years.
Economists are watching other barometers that will impact a recovery. Some think employment will contract again as the worst of the pandemic persists into February and perhaps beyond, producing reduced payrolls at restaurants, bars and other small businesses as well as educational institutions. Bankruptcies and business consolidations also continue to accelerate, which could weaken investment and job generation.
In addition, notes Ms. Swonk, inflation must remain constrained, which would enable the Federal Reserve to continue to hold the line on interest rates and the housing market to stay strong because of record-low mortgage rates.
Against this generally constructive scenario, the outlook looks better for ESOPS and businesses with employee-ownership plans. Based on one significant new study, ESOPs outperformed non-employee-owned companies during the pandemic and are more optimistic generally that they will return at some point to normal business activity.
The study – conducted by Rutgers University and the SSRS survey firm, reflecting data through last September – echoed similar findings about the performance and behavior of employee-owned companies during the 2008-2010 recession. Specifically, the study concluded that majority ESOP firms:
- Drastically outperformed other firms at retaining jobs by a 4-to-1 rate.
- Maintained standard hours and salaries at significantly higher rates than other firms. Only 27% of ESOPs cut pay vs. 57% at other firms. As for hours, 16.4% of ESOP workers had hours pared vs. 26% at other companies.
- Were more likely to provide protective measures for employees than other firms. Consider: 85% of ESOPs sent employees home to work vs. 67% of non-ESOPS, and more ESOPs furnished employees personal protective measures, such as masks and gloves, and provided additional sanitizing and professional cleaning.
In addition, the Rutgers/SSRS study suggests that when deciding to retain staff, ESOPs ascribe higher levels of importance of preserving valued employee skills, ties to customers and clients, a culture of teamwork, and a sense of ownership. Further, the study found that long-term public policy encouraging employee ownership produces greater job stability during a crisis than emergency government spending. In particular, ESOPs were nearly six times more likely to anticipate their business would return to its previous level of performance than non-ESOPs.
ESOPs’ resilience versus other companies ties into the exciting nexus on the merger/acquisition front that occurred between employee ownership and private equity in 2020. This action has picked up steam steadily over the past decade and became mainstream last year.
Private equity’s interest in employee ownership now goes well beyond traditional leveraged ESOPs. It builds on the momentum generated by global investment giant KKR and Pete Stavros, co-head of the firm’s Americas Private Equity, who pioneered an inventive employee engagement and ownership model for hourly wage workers across its large portfolio of U.S. manufacturers.
Other companies have adopted the model successfully, and Mr. Stavros has said he believes KKR has a deal-sourcing advantage because, as he has put it, “CEOs often have a different view when they learn more about our employee-ownership model.” He notes the keen interest in the intersection of the tax and cultural benefits of employee ownership combined with cash and talent benefits of private equity.
Having turned the page on a challenging 2020, owners of private businesses have reasons to look forward to a better 2021. Encouraged by that outlook, ESOPs and other companies with meaningful employee stakes are likely to further benefit from their inherent resilience, which is reinforced by the increased interest of private equity firms in investing in their companies.