Federal Policy Update on Employee Ownership — Jim Bonham

I'm going to introduce our next speaker and that's Jim bonam and he is the president and CEO of the esap association as I think you've heard a couple times uh one of the major policy organizations for esops in DC if not the um Jim has been a great partner supporter of our Institute over the years and I would just uh add that I really really enjoy listening to Jim talk about the sausage that happens uh here in this building among other places in this city so without further Ado come on up Jim and talk to us about [Applause] policy thank you um I'm going to try to rip through this fairly quickly as best I can although I can sometimes be a little bit wordy because I'm going to be watching the back of the room there waiting for Senator Senators to come in and I know as soon as he walks in I better be out the door so first thank you to Meen Conway and and to Matt Helmer for inviting me to present today and I also want to Express gratitude to uh Joe blasy who as I'm sure you all know wasn't able to be here today um I want to make a quick recognition of my predecessor Michael keing whose shoulders I stand on every single day and thank you to Adrien for the introduction and uh all the great work that you guys do at uh at ruter um finally I do want to take a moment and thank thank all the staff who are here today um or who are tuned in from their desks and trying to multitask with all of your other responsibilities you know I've been in your shoes I know the boss always deservedly of course gets the credit but it's your hard work and your dedication your time away from family and friends working long hours in less than ideal conditions that makes our democracy work and anyone whose life has been controlled by phrases like last votes expect by midnight um on recess subject to the call of the chair or uh the boss is finally wheels up deserves recognition so all of you staffers thank you for being here and thank you for your efforts um for the last 5 years I've had the pleasure of serving as the president CEO of the ESOP Association um which is the largest organization in the world supporting and promoting employee ownership um we are the only comprehensive National and increasingly internal National trade Association representing employee owned companies and the professionals who provide services to them our more than 3200 members constitute the bulk of what would truly be considered employee owned businesses in America and in likely the world over the next 10 years alone we are on Pace to spend more than $125 million in support and promotion of employee owners and the expansion of employee ownership I also have the pleasure to serve as the president of the employe ownership Foundation a 501c3 nonprofit dedicated to the growth and expansion of employee ownership through the eof we support public awareness scholarship research and international collaboration and thought leadership we are now the primary sponsor and co-organizer of the annual Oxford University Symposium on employee ownership um for example last year alone we were able to bring together at Oxford the top leaders from government industry and nonprofits from 22 different nations to help formulate a Global agenda to make employee ownership more widely available internationally and I was asked to speak today and provide an update in public policy initiatives in Washington but I'd like to start by providing some context for all of us to better appreciate what needs to be done in order to accomplish our mutual goal and that's the growth of employee ownership in America we're here today inside the US capital because we need to promote and enact government policies that will result in more American workers having the opportunity to make more than just salaries and wages there's a tremendous disconnect in our country between those who do the work and those who gain the wealth produced by that work that disconnect is largely the result of a concentration of ownership of wealth producing assets and I ask you to think about that for just a moment the concept is quite simple most workers ERS do not have access to or the means to acquire wealth producing assets so in order to create even the modest amount of Financial Security they're left with the only option of living below their after tax wages the beauty of employee ownership is that it allows workers to create wealth and Financial Security even through the hard times when they must fully deploy their earned income just to cover life's necessities and emergencies employee ownership provides one of the most achievable Pathways to reconnect American workers directly to the upside of living and working within a capitalist economy the key ingredient here is the ability to participate in more than just earned income but also through participation in the growth of the company itself and the escalating value of that production now we know and I'm sure you've been talking about it all day and we've all profoundly documented the countless benefits of employee ownership to employees to customers to communities better work satisfaction dramatically higher retirement savings safer work environments better wages and benefits more productivity more job security higher quality products and services employee ownership is an absolutely winning formula but it is so easy to forget that none of those benefits none of the public good that comes from employee owners ship ever exists without one small miracle happening a business owner or a group of owners must decide to sell some or all of their business to the employees and even more that business owner must be the one often to facilitate and arrange the sale you know a business owner must be willing to relinquish their wealth producing asset so that their employees can have a wealth producing asset now at the risk of being the skunk at the picnic here that moment what I call the miracle moment under our current Patchwork of laws and policies is what's preventing the growth of employee ownership in America today this is the junction between the economy and business and policies where we are failing as you all participate in this conference and then return to your office and workplaces if there is any single takeaway I would like to leave you with it is this we must do a massively better job to make it easier less risky more attractive and more rewarding for a business owner to sell to their employees full stop the real heroes here are those business owners the Bob Moors of Bob's Redmill Bob Taylor of Taylor Guitars Will rap of Gardener Supply Jack Fitzgerald of Fitzgerald Automall and thousands of others who made that Journey these are the people who turned away from countless offers from private Equity from competitors strategic buyers to almost certainly take a lower sales price and sell to their employes these are the people who ran the painful and allc consuming Gauntlet that is currently required to create an employee-owned company these are the people who are willing to arrange financing provide the funding to hire an independent trustee against who they had to negotiate and they often must even Finance the deal themselves all while turning some or all operational control over to others and also no longer receiving the full benefit of the company profit so with this in mind the formation of a new ESOP is in many ways nothing short of an economic Miracle the economics work against it the regulatory environment is currently working against it the ease of transition works against it and the investor Market markets work against it so within that context let's briefly talk about what's in the pipeline ahead the single most impactful and consequential policy development underway is the pending rulemaking at the US Department of Labor on the adequate consideration exemption under orisa that's necessary in order to form an ESOP 50 years ago when Congress passed orisa it was left to the Department of Labor to describe a reasonable process by which a trustee could arrive at a fair market mark value for a company to be bought by an ESOP it needed to be an arms length transaction where the valuation was done professionally was understood and tested by the trustee and was not somehow inflated by the seller to the detriment of the ESOP beneficiaries it's basically due diligence however the do never did its job and a murky vacuum in the regulatory environment has persisted for five decades within this vacuum the do's enforcement team epsa has pursued a strategy of Regulation by litigation consider it a deterrent strategy against ESOP company Founders and trustees the result has been overly complex and burdensome layers of prophylactic measures deployed in transactions in an effort to avert do investigations and lawsuits that would unwind fair market valuation determinations exp poost facto now Congress intervened in late 2022 in the Omnibus Appropriations act and directed the Secretary of Labor to promulgate a regulation finally describing acceptable standards and procedures to establish good faith fair market value for a company to be purchased by an ESOP that rulemaking is underway with a previously announced release at the end of March it's understandably a slow process so we're not alarmed by the fact that we're now in April Community stakeholders have been consulted in brief sessions you know ours lasted about an hour now now as the leading advocacy organization in the space we invested heavily in this effort um even going so far as to create a draft model regulation we did this both to demonstrate that such a regulation is within the grasp of a reasonable and collaborative process but also to demonstrate the diverse and potentially conflicting interests can in fact be navigated to come up with a reasonable standard for adequate consideration our approach took into it the five Decades of legal B B and one-off settlement agreements but it also took in the Practical views and experience of the regulated industry as a whole something that has been denied through esa's long-standing approach of regulating through threat of litigation this regulation is a Bedrock piece of public policy that must get done right and if it is to a in one way or the other it should air in the side of allowances that result in more not less esops being formed the final public interest test to be applied to this regulation um is will it improve the likelihood of that miracle moment happening or will it make it less likely to happen will more Americans have the opportunity to become employee owners or will less now additionally within that same Omnibus Appropriations Act Congress passed a version of the work act which creates within the Department of Labor an employee ownership initiative and authorizes $50 million in program fund funds over 5 years once established and staffed up this office will be responsible for establishing state level programs eligible for grant funding and an application process for those funds to be awarded now some stakeholders have already been consulted on the best way to administer this program and of course Congress must annually appropriate funds for this in initiative in order for anything to move forward um tea has strongly supported this initiative um written by Senator stand Sanders and assisted in the recruitment of a bipartisan co-sponsor was Senator Moran from Kansas in the hope that it will catalyze more awareness and more importantly the establishment of state sponsored programs to promote employee ownership and as a result create a multiplier of resources through the combination of State programs and funding with Federal programs and funding now as the annual Appropriations process moves forward hopefully it will move forward in the more or less regular order moving forward securing that funding pipeline will be critical and is a major focus of energy it is important because it can provide a source of education and awareness for those business owners but again awareness is not the only problem in my view uh it is actually just an entry-level issue the real problem is the difficulty complexity and risk associated with selling a business to employees that most often results in a seller getting less than they would from any other buyer beyond the work act there are two bills pending in the Congress worthy of note first uh as we just heard from Senator van Holland the employee Equity investment Act of 2023 sponsored by Senator van Holland and Senator Rubio and several others this bill seeks to address both the challenge of financing a sale to an EO company but also would help create a market for investors who would otherwise never risk their Capital to form an ESOP U utilizing the small business Investment Company model this legislation would provide loan guarantees for private investment funds willing to pair their private Capital with federally backed loans to acquire companies that would be converted to esops because these employee ownership investment companies would be competing in the marketplace on a fair basis to acquire these businesses the issue of determining fair market value would be Min minimal minimized excuse me as it relates to Arisa the market would be genuinely determining the price this alone would be a game Cher ining new esops and avoiding that uh regulation by litigation also in the Omnibus Bill Congress began leveling the playing field between C Corps and S Corps and how the 1042 tax deferral is used when selling to an ESOP previously es Corps were ineligible to receive the favorable tax treatment but now beginning in 2029 I think it's 29 I didn't check that for absolute certain it's either 29 or 30 uh a portion of the capital gains from an es Corp will become eligible for the same tax treatment now building on that partial Victory um the promotion and expansion of private employee ownership act has been introduced to make the treatment of s Corps and C Corps fully equal there are many other initiatives underway or under development such as an effort to allow a lookth through for historically underrepresented businesses so that a portion of ownership in a company held by an ESOP may be a portioned to the demographics of the underlying employee owners by doing this a woman-owned business or minority-owned business would not lose program eligibility if more than 49% of the companies owned by an ESOP so long as a majority of the shares are owned by a represented class and there's also an interest interesting proposal in development that could lower the threshold from 30% to 15% ownership stake in order for a selling business owner to benefit from the tax incentives Congress has provided such a structure might encourage more private Equity firms and investors to include employee ownership in their deal and management structures so let me conclude with this we are at a point in our nation's history right now that will be pivotal to the future of employee ownership I'm sure there will be much more talk about the silver tsunami of business owners who need to transition out of their businesses more than 2.8 million privately owned businesses over 65% of them have no succession plan only a fraction of of these businesses makes sense to become employee owned but consider this more than 280,000 of them come from the same industries that are heavily represented by esops have similar market caps numbers of employees and management structures as the existing community of ESOP companies if we can convert just 10% of those companies which is just 1% of the silver tsunami to become employee owned we will more than quadruple the number of employee owned companies in America think about that just 1% of the businesses that is an achievable number if we focus our energies on that miracle moment a business owner deciding to sell to their employees and a process that makes it possible thank you all for having me here today and uh thank you for all of your work