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Martin Staubus's blog

Employee Ownership: Can it Revive America’s Shared Economy?

In 1955, a San Francisco investment banker named Louis Kelso reached a conclusion based on the accelerating growth of “automation” then occurring in American industry. He forsaw that machinery, supplied by capitalists, would play an ever-increasing role in the production of goods, while those who sold their labor would play a decreasing role. Owners of capital would collect an ever-increasing share of the nation’s economic wealth, while the share going to workers would continue to fall.

Kelso was prescient. He foresaw that an elite 1% of the population would amass an astoundingly disproportionate share of the wealth in the US economy, while the remaining 99% would depend almost entirely on wages or a salary to live month-to-month.

Kelso offered a solution: If most of the economy’s wealth would be going to those who owned the investment capital, then the nation would need to make it possible for everyone to own investment capital. The way to do this, Kelso proposed, was to let workers gain an ownership interest in the companies they worked for.

A mechanism to implement Kelso’s socioeconomic solution was enacted into Federal law in 1975. Through it, we have the Employee Stock Ownership Plan (ESOP), a program that has been adopted by thousands of US companies that collectively employ more than 14 million employee-owners who hold well over $1 trillion in stock of the companies they work for.

Providing opportunity for employees to accumulate wealth directly benefits the companies they work for. Unsurprisingly, employee-owners are more invested – literally -- in the financial success of their company and are therefore more committed to working productively, plugging profit leaks, pleasing customers and doing everything else they can to generate the company’s financial success. Research has confirmed that companies with some form of employee ownership grow faster, are more resilient, and are more profitable than other companies.

The value to employees goes beyond dollars. As owner-workers become more involved in business operations as partners, not hired help, they learn how a firm achieves financial success. They gain vital business literacy and a measure of the respect society accords business owners. And they take home their business acumen, using it in their personal affairs to achieve better economic outcomes for their families. The benefits of employee ownership can transform a business and be truly life-changing for workers.

What would it take to make the beneficial ESOP model a widespread option nationwide? In a few words, stronger supportive government policies. The timing is perfect as we face the “silver tsunami” – the wave of Baby Boom-age business owners looking to retire. An ESOP is an ideal exit strategy for these aging owners, as they can sell their company – all at once or in stages – to their employees. If the firm represents a life’s work and is viable, many owners would prefer this option to shopping for an outside buyer or closing the company down. And whether the owner is looking to retire or wants to re-energize

the company’s productivity, federal and state tax laws offer major tax advantages that make the ESOP even more attractive. But for our society to benefit from many more ESOPs, government will need to address the two major challenges:

  1. Lack of awareness of the ESOP as a business solution. The ESOP is a hidden gem, unknown throughout most of our economy. Business owners who would find it attractive simply don’t know they have this option. State and local governments have a strong incentive to increase awareness of ESOPs to retain existing jobs lost if the business is shut down or sold to a large buyer from another region.
  2. Lack of financing for ESOP buy-outs. The typical ESOP can offer a competitive purchase price to a selling owner, but the owner will not typically get that full payment up front. Instead, the price will be paid in installments over several years. Employee ownership would greatly accelerate if state and federal agencies offered a guaranteed loan program or other transaction financing assistance. To policymakers who see the urgency of revitalizing our shared economy, support for this business transaction is a sound value.

Learn how ASBC is working in Congress to support a number of initiatives that would encourage more companies to convert to ESOP’s.

Martin Staubus is Executive Director of the Beyster Institute at the University of California, San Diego.