While the preponderance of research on employee ownership demonstrates that it generates superior performance and growth, improved culture and engagement, and distinctive wealth creation for workers, why isn’t there Are there not more companies adopting employee shareholding? In my 30 years advising on ESOPs – and structuring and closing more than 300 of them – I have continually asked this question. Yet even though the number of new formations has not increased significantly, recent momentum on several fronts indicates that this extraordinary wealth and employment opportunities await millions more workers.
Indeed, the mystery of employee ownership was a topic that my colleague Jake Cravens and I discussed recently on Conscious Capitalists’. podcast with co-hosts Raj Sisodia and Timothy Henry. Given the well-documented benefits of ESOPs for the companies that created them and for their employees, this is a question worth exploring. Our discussion focused on the reasons for adopting employee ownership – and it provided an opportunity to highlight positive initiatives.
Research shows the value of employee-owned businesses to bottom lines and culture.
First of all, it is striking that of the 1.56 million American inhabitants companies with 10 or more employees according to the North American Industry Classification System (NAICS), companies with ESOPs had only 6,232 in 2020 (as counted by the National Center for Employee Ownership). Or compare the 400 ESOPs created last year and this year with the 4,300 U.S. private equity firms. offers completed in 2022 and 5,200 in 2021.
So why so few ESOPs? Innovative research that our firm Verit Advisors initiated provides insight into this and other critical issues. We surveyed executives at 200 companies across a variety of industries, including 90 that had completed a full or partial ESOP, 80 that were considering one, and 30 that were not.
These business leaders identified key factors that also hinder and strengthen interest in ESOPs:
1. Operating rules and the complexity of reporting to regulators as well as the time required to comply with regulations are key deterrents. Other potential challenges – the cost of stock buybacks, capitalization of the company and employees’ understanding of the ESOP structure – turned out to be less severe than executives had initially anticipated.
2. Tax savings are a key factor in establishing an ESOP, with business founders tending to prioritize individual tax benefits while non-founder ESOP managers find tax benefits more convincing companies.
3. Even more so, over time, the workplace culture and benefits of an ESOP play a larger role in CEOs’ appreciation of employee ownership. Research Backs It Up: Surveys Funded by Rutgers University and the Employee Ownership Foundation find that almost three-quarters of employees would prefer to work for an employee-owned company, where turnover is three times lower than that of conventional companies. During the pandemic, employee-owned businesses have grown significantly outperformed key business metrics, including employee retention and working hours, salary, and occupational health and safety.
4. Future ESOP CEOs reported gaining important information and knowledge about employee ownership by networking with their peers and talking with employee ownership advisors.
5. Business leaders suggested that employee ownership advisors do more to tout the benefits of employee ownership and dispel common myths about ESOPs.
As for the future, many encouraging factors appear. Republicans and Democrats continue to enjoy support in both houses of Congress for preserve and develop S-ESOP Founder and Company Tax Benefits. In 2022, the Biden administration and Congress have taken steps to promote employee ownership companies. Worker ownership, preparation and knowledge (LABOR) Act of 2022 requires the Department of Labor to establish an employee ownership initiative. Its objective: to support employee shareholding and employee participation in company decisions. Funds appropriated by Congress can be used to finance existing public programs or to create new ones.
State legislatures take similar steps. California, Colorado, Massachusetts, Missouri, and Washington have created centers to encourage employee ownership and have adopted tax and other financial incentives. Other states, including Iowa, Nebraska, New York, Pennsylvania and Tennessee, are considering comparable proposals.
Prominent business leaders also encourage employee ownership. In June, the Aspen Institute and Rutger’s Institute for the Study of Employee Ownership and Profit Sharing co-hosted the Employee Ownership Ideas project. Forum which focused on how to develop employee ownership. Adria Scharf from the Institute is currently conducting a study on this subject.
KKR partner Peter Stavros also plays an invaluable role. Stavros, co-head of global private equity, founded the nonprofit Property works which has made employee ownership a common topic among business owners and advisors. He and his wife contributed $10 million to establish the Center for Shared Ownership, and an impressive number of private equity funds, other major financial institutions, and individuals have contributed. joined to help them reinvent equity in order to create wealth for all.
These and other positive developments support my previously expressed view that the 2020s will be the decade of the ESOP. As these tailwinds continue, I believe tomorrow’s pundits will identify the present moment as one where employee ownership has reached the tipping point and gone mainstream.