Ownership on the March: Recent Progress in Supporting Employee Ownership

all right it's uh it's my pleasure uh to introduce the next panel on ownership on the March recent progress in supporting employee ownership and we're going to begin uh with a uh a speech by uh Jim Bonham uh Jim doesn't need introduction uh he's the president uh and CEO of the ESOP Association and also the employee ownership Foundation uh it's no exaggeration to say that uh that Jim uh is the senior thought leader and policy leader of the employee ownership community in the United States and he sits in a rare seat uh hearing from the thousands of companies who are actually uh doing this uh uh rather than just the sort of the pointy headed scholarly research and the sort of uh uh in the uh in the sand practitioners Jim sees and hears it all and so uh uh Aspen and Rutgers are very pleased that he is going to tell us like it is for the next 15 minutes Jim thank you very much thank you Joseph all right if uh anybody can't hear me in the back I mean at least are waving your arms because I do have a tendency to wander a little bit from the uh the podium and also to uh to to speak a little softly um so I first want to start by thanking uh Marine Conway from Aspen for hosting this ideas form and for Aspen's interests and efforts to advance employee ownership um for those of you who work on the hill or have worked on the hill you really understand when Aspen starts taking on initiative what that means so the fact that Aspen has taken such an interest is really tremendous and I could not be more grateful I also want to thank Adrian Eaton uh the dean and Joseph blasey the director of the Rutgers Institute um and on behalf of the employee ownership foundation with whom we've partnered for decades now most of that under Michael keeling's leadership who's here with us today um you know I thank you for your work especially the body of research and all the data collection that's been amassed in that nearly three decades over four decades three decades um I also want to express my gratitude on behalf of our membership for those of you here from the media all the facilitators and the panelists and of course the Congressional staff who are coming in and visiting throughout the day um now as you all hear throughout the next couple of days America has in front of an opportunity to recalibrate the employment bargain between employers and the owners and I believe indeed I suspect everyone you hear from during this forum believes that many of the tensions many of the difficulties many of the core problems we face in our nation are firmly rooted in wealth and compensation inequality and that employee ownership is not only an elegant solution to those problems but an imminently achievable solution was a proven track record of results over the last five decades so I want to set the stage a little bit about what's been happening in Washington and state capitals uh across the country why are we here and why are we here right now why is this moment so important for employee ownership um we've heard our reference already to the silver tsunami you know over the next 10 years more than two and a half million baby boomer business owners will need to transition their privately held businesses to new stewardship when they retire many will be passed to the next generation of the family many will be sold to or merged with a competitor a strategic buyer many will simply cease to exist the assets being sold off in liquidation sales and their jobs go away this will be the single largest transfer of wealth producing Assets in history 7.3 trillion dollars of private businesses according to New York Times just last week over 65 percent of these business owners have no current succession plan now we talk about the Boomers but not far on the heels of the boomers are the Gen xers who already collectively own 6.8 trillion dollars in privately held businesses so this is not just a 10-year opportunity it actually extends beyond that currently the top one percent of American households hold as much wealth as the bottom ninety percent combined and for that bottom ninety percent the vast majority of the wealth that they hold is actually their home the engine for the wealth accumulation at that top one percent is ownership and that's why we're here today to find ideas and Pathways to create more ownership of wealth producing assets for average Americans to find ways that this literal once in a generation opportunity to recalibrate the agreement between employees and and owners is not squandered or lost all right I want to start quickly you know Joseph gave a a brief introduction about you know who are we who is the ESOP Association employee ownership Foundation so I want to share a little bit about the organizations and companies and professional service providers that I speak for today I have the honor the privilege to serve as president and CEO of the ESOP Association and I'm also the president of the employee ownership Foundation now while related these two organizations serve different parts of our mission combined we will spend more than 100 million dollars over the next 10 years advancing the cause of employee ownership the ESOP Association is the only comprehensive National trade Association for ESOP companies and the professionals who provide services to them our membership includes more than 2100 employee-owned companies and that includes nearly every company in the nation that is majority owned by its employees through an employee stock ownership plan our membership also includes over a thousand professional service providers and firms who perform the work of establishing administering defending advising and serving as Trustees for esops plainly we are the largest organization in the world advancing employee ownership we represent over 1.3 trillion dollars in value and the roughly 10.5 million ESOP plan participants in the country to put that in perspective as I often like to do if you combined the entire U.S Auto industry from the manufacturers to the parts manufacturers to the service providers and the dealerships they represent 8.5 million employees or two million more it's an important point to understand how large employee ownership actually is within our own economy every year our association produces more than 160 live or virtual educational conferences that are attended by more than fifteen thousand people Nationwide and those events on average between 10 and 15 percent of all of our attendees are the business owners or senior managers at those businesses who are investigating the option of selling their business to our to their employees through a Nissan so both through our direct contact with business owners and through our professional members who are trying to make these deals happen we are keenly aware and in tune with the obstacles to forming new esops and to keeping existing esops going and while I always and genuinely join the celebrating our friends and allies in the work of co-ops and the employee ownership trust space there's no doubt has has already been stated esops remain as the single largest and most successful model of employee ownership at scale we look forward we always want to work with and partner with these other forms of employee ownership but as you might imagine I tend to wear the hat for esops and Champion them the most the employee ownership Foundation is our Affiliated 501c3 and is supported almost entirely through voluntary contributions made by our membership of the usop association since 1992 the foundation has been one of the largest funders of data collection academic research and financial support for programs Runs run by Rutgers and others in employee ownership space and the foundation now raises and spends over a million dollars a year in this space so my role today is to discuss the legislative and Regulatory initiatives that have been underway over the last roughly five years at the federal state and even local levels and I'll add to that a growing International collaboration that we are stoking as well with Partners in the UK Canada Japan and throughout the EU it's great to see Graham not all here and if you don't know Graham certainly get to know him he's an amazing individual it is will become if not already known as a giant in the employee ownership space worldwide there are numerous barriers or friction points to the growth of employee ownership that are being addressed in small and large ways and I put them all in roughly five buckets first bucket would be rules and regulation or more appropriately stated the lack of specific and reliable regulation on the most Essential Elements to ownership the assignment evaluation to the business asset to be bought or owned by an ESOP it is our belief uh and it is our belief that this one area is the root of most obstacles to new ESOP formation and their ongoing operation you simply cannot establish an ESOP or properly run one if you cannot assign a value to the business according to well-defined regulation that is taken into consideration the views and the wisdom of interested stakeholders to the process second bucket would be Capital Finance there is ready availability of Finance to form new esops or re-leverage existing esops up to about 80 to 90 percent of the transaction however the inability to fully finance a business into an ESOP at reasonable fair market terms is a deal breaker for a huge number of otherwise willing business owners who had found an ESOP the third is awareness and knowledge now these are two very different things now I am not one who believes that there is a lack of awareness of employee ownership or esops in the marketplace what I do believe is that when the conversation is initiated inside the corporate Suite about potentially selling the business the ESOP option is raised and then perhaps very superficially dismissed rapidly due to a lack of knowledge mostly on the part of business advisors who the owner has been trusting for years and years and years as they've grown their business the fourth bucket would be incentives now business owners need to be properly incentivized to go through the challenge and expense of forming an ESOP versus the ease and simplicity of selling to a strategic buyer or to a competitor and the fifth would be sustainability managing the repurchase obligation for departing plan participants has become perhaps the single biggest reason for Planned termination and the sale of an ESOP so what are we doing about these five buckets I want to talk about each one in its own and the first is the area of rules and regulation you know when when erisa was passed in 1974 Congress expected the Department of Labor to promulgate regulations to define a term called adequate consideration and for those of you who are unfamiliar with adequate consideration it basically boils down to this has the trustee that's responsible for protecting the interests of the employees or beneficiaries of the plan provided a good faith fair market analysis of the value that the employees are paying for the shares of that company have they done that has the trustee done his or her job and making sure they're not overpaying for the company well that's what ownership is in a nutshell is having a willing buyer and a willing seller come together on a price now in the late 1980s the department of labor initiated but terminated uh and never issued these regulations but then starting in 2008 the Department of Labor has had in place a special investigation project aimed specifically at esops and since the initiation of that project over two-thirds of all existing esops have come under investigation by the Department of Labor now imagine if two-thirds of the businesses in this country came under investigation by a federal government agency what would happen with the Chamber of Commerce or what would happen uh with the nfib and the Hue and cry that you would hear we have been trying to raise that as the the attention level of that for years now the massive chilling effect of this initiative has been compounded by the lack of clear regulated regulatory guidance for business owners seeking to form an ESOP so this one-two punch makes it quick work for an advisor to dismiss the employee ownership option for an otherwise willing founder and I can say I can't tell you how many times I have had a business owner who really desires to sell to their employees come to me and say I just can't do it because I I don't want to have uh second guessing five years seven years ten years down the road we're trying doing everything we can to follow the rules such as they are but it's just too much so I'm going to go sell it to private equity now the Department of Labor to their credit Will point to a series of lawsuit settlement agreements that they have struck with individual businesses that they feel are sufficient guidance and we could not agree disagree more because those uh what they call Process agreements were created with no stakeholder input they are unique only to the facts of that one case they were struck under duress a threat of a lawsuit with the U.S federal government and they change in order for us to have a reasonable approach to forming esops and to remove some of those barriers we need to have clear regulatory guidance now fortunately last year in the secure 2.0 act which was passed at the end of the Congress Congress directed the Department of Labor to formally issue these regulations and the Department of Labor has committed in writing to us that they will do so with stakeholder input with a formal notice of common rulemaking and I'm also pleased to announce I'm not sure that any of you stay up late at night watching the Department of Labor's website but we do I'm pleased to announce that just last evening the Department of Labor published a notice that they have formally entered the pre-rule making phase and are undertaking stakeholder meetings on this rulemaking this is a Monumental moment for the ESOP Community because getting these clear rules starts a Cascade effect um I I love seeing and hearing Heather talk about well we need to streamline the process we need to make it easier to form esops we need to make it easier to administer them that begins with Clarity on how you value once you have that Clarity it becomes so much easier because right now what we have is a layer upon layer upon layer of redundancy and cost in forming an ESOP to be protected against the Department of Labor investigation so we're really thrilled that this is one of the main things that's going forward now this is going to be a long process we're thrilled that there's going to be stakeholder input and it's necessary so this is one of those please stay tuned in this spaces in the space areas I'm going to move on to finance creating a complete Capital stack for ESOP formation has been an enduring issue for decades so here's the scenario in basic layman's terms you know a business owner wants to sell their business they entertain offers the buyer usually arranges the finance for an ESOP you have a cell team and a buy team and the owner is working with the trustee to arrange the finance in almost every transaction the seller is required to finance part or even all of the deal this is a deal killer for most sellers when they make the decision to exit their business most of them just want out they want to sell their business they want to go buy their boat they want to go travel the world they don't want to be encumbered with will the new management be able to run the business and will I get the rate of return that they have promised me by giving them a seller's note this year about a month ago the eeia the the employee Equity investment Act was introduced thanks to the the tremendous efforts of a whole host of folks it is a strongly bipartisan bill and the eeia in combination with the Main Street employee ownership act that was passed back in 2017 seek to address some of these Capital stack shortfalls eeia utilizes the existing sbic program creates employee ownership investment funds that can access government guarantees to finance up to 100 ESOP transactions the ability for these funds to on their own seek out companies to purchase and be able to offer not only what they believe is a fair market Price but also have the financing to close the deal is a game changer this piece of legislation could dramatically increase the number of esops being formed now this is going to be another long road ahead but we are committed to making sure that this legislation becomes law the third area is this area of awareness and knowledge now awareness is what it actually is this creature called employee ownership you know about four years ago we had Frank Luntz who is a brilliant Communicator come and talk to one of our national conferences about you know esops and one of the first things he said was what is an ESOP I thought it was like a fairy tale like esop's Tails because why are you guys not just calling this employee ownership why are you not the employee ownership Association well there is sort of this you know profound you know lack of awareness or lack of knowledge of what do you mean your company is owned by the employees that doesn't compute for me because in the American lexicon when we think about ownership there's some rich guy or a rich family that owns the company that you work for or it's a publicly traded company and a whole bunch of shareholders on it but it's really sort of controlled by a smaller group of people but awareness that there is a model of business where the employees are the beneficiaries of the growth and Equity of their own company needs to be increased now knowledge is in the area of professionals who can navigate a Founder a potential founder through a transaction and this is an area where we need to have some work now in the in the work act that was passed last year we created the new employee ownership initiative within the Department of Labor and this initiative is designed to start addressing both of these issues this year the first step is to actually create the office create the initiative and while that sounds simple it's not the easiest thing to do because the first step is deciding where to house it the Department of Labor is not a monolith they have ebsa the employee benefits Security Administration which is the enforcement division they're the ones who conduct investigations they're the ones that they prosecute but there are lots of other offices in fact I think we're going to hear later today from the director of the oasp oasp at the Department of Labor which is designed to promote policy and to encourage retirement plans now if you're going to have an initiative that promotes employee ownership do you put it with the guys who are investigating all the employee owners or do you put it with the guys who want to promote it the placement of this office is critical and that's what happens this year starting next year Congress authorized the expenditure of 50 million dollars over the course of five years in Grants that the Department of Labor will award to States to run programs designed to raise awareness to provide additional knowledge and training for professionals and for business owners and indeed to actually provide funding for feasibility studies for the formation of new esops so the second task after getting the office located in the correct place the second task will be to make sure that all 50 states are aware of this opportunity so that they will they will plan for it and they will make application for this grant funding because my belief is that 50 million dollars will not even come close to the demand that's going to be out there for it this is already including the work act but again we have a long road ahead we have to seek Appropriations we need to make sure that it's properly administered and that it's located in the right place moving on to incentives if there's any lesson about ESOP formation that we've learned in the last 50 years it is this this is going to sound really simple there is no employee ownership without the founding business owner selling to the employees esops don't start on their own they start because a business owner makes the decision to sell to their employees the primary incentive of the US is the 1042 tax deferral for the selling shareholder however since the mid-1990s the corporate form has been treated differently only C corporations were eligible for the 1042 exemption now thanks to the work act that was passed last year we are as corporations will begin to be eligible for this same tax benefit it's a start but as Senator Cardin said we still need to harmonize the treatment of s-corporations and C corporations this is a very expensive proposition for those of you who understand CBO scoring there are also States now looking to provide their own incentives using taxes grants and other types of supports and there'll be lots of people talking about what's going on all the various States and the finest final areas is this area of sustainability and there's two main areas in sustainability for esops that I want to highlight and when I say sustainability you know in order to grow employee ownership you can't lose the existing employee-owned companies to sales the single biggest driver of the termination for uh ESOP plans is uh is the repurchase obligation that you have a class of employees who have over time accumulated significant value in their ESOP account and the business finds itself in the position that it can't really afford the RPO without significantly re-leveraging itself or doing damage to the business or as long-term plans at the same time they're getting massive offers coming in from private Equity or other strategic buyers so The Simple Solution is we'll just sell it we can still work here we'll all get a Payday but the employees are no longer the owners there needs to be some greater flexibility on timelines for accounts in excess of a certain amount there also needs to be a look at the diversification requirements that are applied to ESOP plans because what happens is that employees will reach a certain age and then they will immediately start diversifying their account even though they are widely Diversified through their 401k um the other couple of areas on sustainability I really want to just touch on very briefly is that we need to do something to address conversions from employee from business private business to employee owned they become constrained to to some structural impediments the one that is most easy to explain or government is in the Government Contracting space we have thousands of women-owned minority-owned veteran-owned businesses that would love to become esops many of them have are partially stops but they can only go to 49 percent because the moment they go to 50 percent they lose all of their preferential status for as a government contractor so there needs to be some kind of a look through provision to apportion the ownership shares of the ESOP itself to the ownership of the company so they can maintain their status now I could go on with a number of other ideas especially in the ESG space others but I see Joseph has given me the hook so I will uh I will wrap things up there and again thank you thank you Maureen for having me thank you Joseph for having me I'd like to introduce the panel first of all uh Eleanor Mueller who is economics reporter from Politico her deep insights and experience are so welcome Eleanor thank you very much for taking over this panel and will the members of the panel uh Ike Brannon president of capital policy analytics uh a senior fellow at the Jack Kemp Foundation former fellow at the Cato Institute and a long time experienced Hill staffer uh Ike thank you very much ID caldero senior vice president finances strategy crepesa latte an ESOP company and finally Kim Baker CEO of new age Industries with that I will pass the Baton to our wonderful moderator all right well thank you so much for having us the moderator of the earlier discussion was actually my editor so we're keeping it within the family today my name is Eleanor Mueller I cover Congress for all of politico's Economic Policy teams um that includes the labor and before that I was actually a labor reporter so I've written a lot about minimum wage unions Child Care paid leave a number of things but I've admittedly not written about employee ownership and so I'm excited to learn a little bit more about you know what we're talking about today uh I'd love if we could you know go around one more time and introduce ourselves and you know say what you hope to get out of this panel today and Ike we'll start with you great uh thanks so my name is like Brandon uh uh so I I'm at a consulting firm called Capital policy analytics and I'm a senior fellow at the Jack Kemp foundation and uh once upon a time I was a chief Economist for the Senate finance committee I worked for Orrin Hatch who was a big proponent of esops and we spent a lot of time thinking about how to make their lives easier and as we pointed out it's it's not a uh it's a very difficult environment for them to uh to grow right now I'm a reformed investment banker or former investment banker um and I found my weights at esops I after working on Wall Street for a number of years and helping billionaires make more Millions um I decided to take my skills and help the Middle Market small business small businesses with raising Capital secession planning governance and growth strategies and along the way while I loved working with the entrepreneurs who had founded their business and helping them Empower themselves and grow the value of their business I also saw so much about the impact that their businesses had on their employees and the contribution their employees were giving them to help grow and I fell in love with the ESOP structure and I convinced the client to turn down a private Equity offer um it wasn't just my convincing they went through it and learned Eyes Wide Open some of the limitations of selling to private equity I will give myself credit for getting evaluation in an ESOP that beat PE um and we converted crepesa latte to 100 ownership uh five years ago what's Crepes a latte we are the market leader in experiential Hospitality we create amazing brand experiences for big companies like Pfizer and Amazon at major events like trade shows we have about 33 full-time employees a 150 part-time employees and we recently updated our plan to allow some of our part-time employees to be eligible for the plan which we're excited because there are brand ambassadors and I have the also welcome trophy to say that my ESOP advisors all tell me that we were probably one of the most coveted impacted companies that they worked with so we lost 100 of Revenue not for a couple weeks not for two months but for about 14 to 16 months and then had to rebuild and are now post covid 30 bigger than we were in 2019 but uh still working through those challenges and I'll be excited to talk about how employee ownership impacted US during covid hi um Ken Baker uh CEO of new age Industries I'm also the co-founder and board member of the EO um eox uh um and I'm also uh co-founder of the um PA CEO of the Pennsylvania Center for employee ownership so I'm very much involved with the awareness portion of the industry New Age Industries I'm I'm part of the silver tsunami I guess I sold the um uh I sold all the shares I was the last Baker standing bought out my brother bought out my father in the 90s and um I did the ESOP not 100 at uh right from the get-go but did it over a period of time which I think is one of the better ways of doing it if you start early uh I did 30 percent uh 16 17 years ago then ten percent nine percent still had 51 percent of the company could do anything I wanted and then in 2019 I sold the last 51 so we're 100 employee-owned Sub sub chapter S corporation we're a manufacturer of plastic tubing and hose and rubber tubing and hose and RFID tagging Solutions we were very much involved with the pandemic uh vaccine we supplied Pfizer um moderna and J and J with single-use systems to make the vaccine so it's been a wild ride share price has just gone through the roof and repurchase obligation is a big issue and we're very much involved with that I had 31 million dollars going out the door uh for last year um so but we still have 49 millionaires working at the company and uh 27 of that 49 are multi-millionaires and so we have about 285 employees so we are creating a lot of wealth for our um our team members so repurchase obligation is a big issue um and um so I'm all ears about coming up with ideas we've already done a re-leveraging of 30 percent of the shares and we we could talk about that if you'd like all right well before we get into the regulatory aspects of this all I want to dive a little bit more into the positive impact that being employee owned had on idea your company and can yours and I day we'll start with you yeah um well being in the Live Events business particularly major events conferences that tend to have 20 30 000 uh attendees uh March 2020 uh we were faced with the fact that all of our events canceled and then you know two weeks we planned for six months thinking that Q4 2020 we'd be back and then by June we knew nothing until there's a vaccine um we had to ask each employee to take a pay cut as a leadership team we spoke and basically we were committed we were not going to furlough everybody even though there were people in the warehouse and in shipping that we would have no functional need for because there there was no job to be done but we committed to keeping everybody on uh to asking for pay cuts as well as reduction in hours we did limited furloughs really more to give executive leadership time and when I say like three to four week four lows to give executive leadership some time on what to do with everybody and then focused on a pivot where we launched a new product within 60 days of going home and were able to achieve about 10 percent of revenue from that pivot which I think is remarkable if you think about launching a new segment you'd be glad to get 10 in the first 24 months every single person helped on the production line of our better together boxes sales people included executive leadership included executive leadership took even larger pay cuts than our our normal team members and we shared all these actions transparently as well as in one-on-one meetings so open communication and updates as to how the business were going gave us the buy-in where it points in 2020 people could have gone on unemployment benefits and made more money I mean we were concerned about that of that creating that type of culture and we didn't have to have a concern and so as long as someone was willing to come into the office and support us we were we we found something for them to do and they contributed to improving our product that we you know we didn't know what we were doing when we launched it another key statistic is we went back to the office in June 2020 late June 2020 all wearing masks social distancing uh got really really minimal kind of issues there we were 100 vaccinated our full-time team members in June 2021 also no pushback and we had all of our part-timers who we reonboarded uh also 100 vaccinated this is required at most major conferences to enter and so we had to make it a mandate once again we lost a couple part-timers but we were able to more than hire to offset and not have an issue and I think 100 attributed to our culture of employee owners that make our company a place where people want to work and thus mandates like that aren't mandates they're about supporting our ability to operate and do business and then can you spoke already a little bit about the wealth benefits to employees at your company are there other positive impacts you know that being employee owned has had upon your operations yeah absolutely um getting I mentioned at the previous um uh segment about continue process Improvement um getting uh team members to actually really engage in improving the organization improving the profitability of the organization so I'll tell a story or two about that there's going to be some people rolling their eyes in the audience who have heard this story before so um uh when I'm in the business uh um I do my mbwa managing by wandering around saying good morning how about those Phillies they won last night and happy birthday to somebody on the floor we have a very large building uh and uh so we have a lot of Fork trucks going bringing raw materials to the end of the production lines taking finished goods back to the warehouse so I see one day one of the fork truck drivers laying a patch you know what I mean spinning the wheels of the uh the fork truck basically beating up the fork truck beating up the wheels of the fork truck putting marks on the floor just not doing what you really should be doing with a fork truck so I go up to him and I say why is it that you're beating up your fork truck and he kind of goes like this and I say here's a better question why are you beating up Joe's for a truck because he owns that fork truck too and his head goes down it's a different conversation they own everything in the building they own the scrap they own that fork truck they own all the maintenance that will that for truck would have Second Story we had seven people retire last year uh walked away with tens of millions of dollars between them one of the gentlemen was a customer service representative didn't make a tremendous amount of money but was with us for a long time and had early shares and a good team member we had a party with balloons and cake and I gave a speech about everybody and this one gentleman comes up to me and says Ken when I came to work uh at new age 18 19 years ago I thought I would have to work till age 65 based on numbers I'm 60 years old and I'm retiring and the ESOP was able to allow me to retire both of my parents are still alive they're they're local I have a couple kids that live nearby and I have some grandkids basically this ESOP gave me five years to take care of my family so that's pretty cool that's what this type of business model can do it can change lives and the money can be actually generational If somebody walks away with three four million dollars which we do have those team members that if if they invested right that money can actually be inherited down to the Next Generation and maybe even to the grandkids company but I'd assume that there is an employee owned company that motivated you to become involved in this space I mean what do you what do you think of when you think of that thanks so um so two things so I'm from a small town in downstate Illinois outside of Peoria uh and uh the bank where I you know I've banked ever since I was little is uh is the Morton Community Bank which is uh an ESOP and it's uh actually the largest s-corp ESOP Bank there is and since I Bank there you know when I was I was little I was given a hundred dollars worth of stock in it at one time and I gradually invested and we remained my wife and I we got married about 20 years ago when it can right soon after uh soon before it converted to an S corp uh ESOP and so we've remained shareholders and it's uh it's been the best thing financially that's that's ever happened to me and uh you know by uh by Dent of growing up in a small town where everybody knows each other I I've known the president most of my life and uh having a a PhD I'm occasionally doing things for them and so the last time I was home I met him for breakfast and uh he took me to uh on a walk through the uh the main headquarters we have now 55 branches across central Illinois uh it's a four billion dollar bank and he likes to introduce me to his millionaire tellers um and everyone who you know one of the things you observe with esops is that uh tenure goes up quite a bit people are much less likely to quit uh so I I did my PhD in economics at Indy University one of my advisors was uh Ben Craig and Ben Craig became a prominent labor Economist because of a series of papers he did with John pencavel from Stanford on uh productivity and uh firm ownership and so what uh Ben and John did is they got this data unique data from all these uh Lumber Mills and uh facilities like that in the Pacific Northwest and there was a wide variety of ownership structures some was ordered by owned by sea companies some were ordered owned by uh soil Proprietors and some were if not ESOP some were esops and then some were also owned by employees in a non-isop Arrangement and so the fundamental question they were trying to determine is does how we arrange ownership affect productivity and the answer was unambiguous it it does quite a bit that employee owned firms are significantly more productive and you know it's not it's not it wasn't incredibly intuitive at the time in economics so you if you know for instance if you uh do a C corporation and you allow people to own uh to buy shares you give them shares it it's such a small proportion of of the company it doesn't really seem to matter a whole lot why and again you know you take your example these people don't own all that much more of a share why does it matter to them but it does it has a big deal and you know one of the things that that you observed was was was uh spot on is that people stick around for a lot longer and it turns out uh productivity goes up quite a bit when people stick around longer um and then the other thing that they found out uh again just apropos your story is that um uh you know the the kind of the wear and tear of the equipment depreciations seem to be lower in employee owned firms so uh you know these articles are published uh in the late uh in the late 90s but they're still a pretty seminal in in this area a little bit now and I did you were talking about it the conversion process for crepes The Latte what was your experience with you know the regulatory space and what are some things that the government you know could do differently from your perspective yeah um so so I like to balance for those who you know having gone through a number of transactions throughout my life including venture capital and private Equity you know Bank lending mezzanine the esap transaction in itself is not wholly that much more complicated than anything else it does require more effort from the seller side which to run the transaction which given that many uh entrepreneurs that's not their fundamental skill set um it takes longer than like a PE transaction because they they're not they don't know how to set the toll gates to actually effectuate decisions that then get to like the closing where you run into the complexity is in the running of the plan and synchronizing it with the business um and like and the uniqueness of your business your employee base and your growth plans that is where um particularly planned design where it's if you give a benefit you can't take it away concept within orisa is is difficult to manage because you're trying at plans for something 20 40 years down the road a lot of early esops we were lucky we did not make these mistakes but we've made other mistakes um it gave away too much too early right that's like a really big concern um but knowing that you're making a decision today that could impact where the company is 20 years ago and really cause issues is really hard so if you're talking about regulatory relief some level additional flexibility that's still inherently protects workers you know the the wealth that they've been given through the stock that's absolutely important but layers in some flexibility for the company to know if the plan has to change over time and if you give if you know if if you can't change it in some ways make it more restrictive in the future you could be endangering the esap long term and that's not good for the for the shareholders and not you know some other great ones would be um Jim was talking about the 8A program just certifications in general so the aid program is for disadvantaged businesses and the Federal procurements system but certifications in general really are very oriented to the person and not a group body and it's such the forms that you fill out all the things the way people think about who owns what is not tailored to this concept of esops and group ownership I think that's fundamental I personally think this there could be set asides particularly from large businesses I have gone to our our major clients are all Fortune 100 companies like Pfizer and Merck and in the extent that I am speaking with procurement individuals I bring up that we are 100 employee owned and it could that be fit into their ESG and I think I've made an inroads with one of our clients that we're going to see where that goes but these are things that owner like employee owner owned companies management team should be having those conversations within their respective Industries um Banks I think should be reporting on ESOP funding as a key requirement to their Regulators I think that could be another once again just like we spoke about advisors not really knowing a lot of banks really don't know the ESOP space so then of course what we have is we're concentrated with a couple banks which is great for them but not great for more esops right um because they don't know how to underwrite ESOP so if we had to report on esops it would automatically start making people think hey we need to build this specialty specialty and the sbic the sbic investment is great and then um yeah and there's a whole list of things we could be changing and improving on and we just have to focus on a couple and get those done and move forward but there is definitely a lot of regulatory relief that is required to ensure that as more businesses are enter ESOP space the regulatory requirements can can meet the needs of more companies and the diversity of those companies and more most importantly it's these smaller companies so Crepes is a very small ESOP right we're 33 full-time employees when we started we were about 20 21. um now we're a very profitable company that helps us pay for all the expense structure but um like getting it to companies smaller than us is going to be key for growing this number of esops and then ideally those small companies get bigger over time but if it's too hard to enter if you're one million two million in ebitda they generally guidance is two and a half to three million minimum then we're automatically decreasing the pie of potential employee owner companies and anything you want to add about you know your experience with the regulations around conversion well um I wanted to talk about a little bit of uh awareness and and how state governments can help out which is uh creating offices of the employee ownership within the state government within community and economic development uh at the PA CEO we're working on a bill uh on that and and uh and there are certain uh Colorado I I think we had a discussion on that all the states should have that type of office and actually funding different things could be um feasibility studies it could be uh uh financing it could be all sorts of things so I think that would really help out the industry um I I'm going to get on my high horse and and talk about private Equity once again I the the it's not a equal uh playing field the uh the the tax liability of of an uh sub chapter S corporation and when the employee gets the benefit it's it's taxed at ordinary income and so private Equity should be taxed at ordinary income and and then they're not and and um if if that went away there would be a lot more esops because that's a com in my in my view uh with all the conversations I have with selling shareholders uh that is the competition which is uh the um uh private equity not all private Equity is bad there are some good private Equity firms but the vast majority they're well the the previous panel talked about that I I forget the woman who who talked about that it was it was a great story that that she told very well I think that's your cue I mean how can tax policy help support employee ownership um you know it it's uh It's Tricky these days and Congress as all of us are aware of to uh get uh bipartisan legislation passed and especially I think the next two years when it's it's really difficult to conceive of us doing anything uh kind of on the tax front or the regulatory front in terms of major legislation but you know I always uh take great great admiration and my old boss Senator hatch who was a big advocate of uh both esops and S corporations and when I worked for him he um one of the things he did early on in each new Congress is he would meet with the aicpa and he would um and he he started doing this 90s and he would ask them to come up with 10 things he could do for S corporations and esops that would make their lives easier and uh and so he had this list and he carried it with him and when he would go into some kind of negotiation and he knew he had some kind of uh leverage to get something he would kind of go along the list and you know whoever The Economist uh was the advisor tax guy was sitting next to him we would tell him you know we'd have them ordered in terms of kind of costliness efficacy and we'd say see if you can get number four and we'd settle for number seven and but really every Congress he would get a couple of things that would make life a little bit better for esops or S corporations and in fact the the thing that um uh Senator hatch did but this is even before I uh I worked for him that was very effective is um and and would and our bank would not be an ESOP S Corp if it were not for this is um uh when you define ownership in an S corporation it's it's a hundred uh it's a hundred people but if you're related to one another you count as uh as one owner and uh what Senator hatch put in uh is that the relationship goes for uh five generations so if you have the same uh if if we were to have the same great uh one great grandparent we would count as one family um so uh you know Morton the town where our more in Illinois that sounds Bankers was founded by a a sect that was an offshoot of the Mennonite faith and these people were basically pushed out of Germany and all settled in mass and uh in Morton and my grandmother was an infant at the time was one of those people so it turns out we are we are all related to one another and so wow um you know our 100 shareholders uh goes up to uh I think we have five or six hundred uh different people who actually own uh stock and so you know there's some you know we heard the previous one there's some really important things that are kind of big that need to be done to help esops and absolutely we should be uh pushing for this but we should always keep in mind um look take what we can get a half a loaf is better than the no Loaf and just thinking about what we can do just to push the uh the ball down the the road a little bit is uh is I think always especially and especially in this situation uh the the best strategy for advancing the cause of esops thing but this obviously is an issue that has some bipartisan buy-in and so what's the half of loaf on the table now to use your phrasing um you know I'm not sure that anyone's really thinking about the heart about this and any of the Committees that have jurisdiction so you know I what I follow most closely um uh because I I have some uh you know experience there you know house Financial Services the Banking Committee and uh the uh Senate finance committee and uh you know it's on the finance committee which has of course jurisdiction over taxes is trying to figure out what to do about the tax cut and jobs act many of whose Provisions are expiring and so to me uh you know they might be able to do something on that in the next by the end of 2024 but I suspect that there will be a big fight in 2025 when that expires and our individual tax rates go up uh the both sides are not going to want to have all those tax rates go up and so I think I'm not sure what it is it's out there that we can grab for esops but I kind of think that this is the vehicle that we need to be thinking about attaching stuff to right now and so um you know thinking about how you can inform the finance committee in Ways and Means Committee staffers about uh about the things the the hindrances to esops and their benefits are is the way to go you know one of the by the way one of the things I uh I do besides my consulting firm results I run this thing called the um with a couple of my friends it's called The Savings and retirement foundation and 95 of what it is is a seminar for people with phds in economics who like to think about issues related to um savings and retirement issues and so we have a lot of uh participants from the treasury from IRS Social Security ebsa and so um if you're the type of person who likes to follow research related to this and we do have people occasion talk about um esops uh let me know and we'd be happy to put you on the list and you know right now unfortunately we're still mainly doing Zoom but uh last last summer we we did an event in this in this room to talk about uh savings and retirement and the situation and uh uh you know as you remember last year was still almost impossible to get people into the capital so it's great to be in the Capitol and people are kind of mingling about again all right well I Dave will turn to you as craves a latte pla plots a path forward um what do you hope that policymakers keep in mind small company once again I would really say putting employee ownerships into ESG uh initiatives at the corporate level and at the procurement level will really help grow employee ownership right because now knowing that when I'm working with our clients like Abby and Novartis that we're getting preferential treatment for being employee owned we'll make our procurement process let me give you an exact number they take 90 days to pay us we have to expend all of our money and they take 90 days to pay us but the procurement people told me that if we were a woman or minority owned business they could give us 30-day terms so that's a that's a big number in terms of financing so these types of things that could help smooth the pipes of employee ownership and allow for platforms for growth of small businesses that then you know go back to the Investments of our local community are important and they don't have to just be federal laws they can be done at the state level as well as at the private level where you get these large multinational companies to acknowledge that we belong in the ESG Forum of their reports and we're going to take a brief pause actually for a new speaker and then come back for Ken's answer as well as questions Eleanor thank you and thank you to the panel my name is Jack Moriarty I'm an Institute fellow and excited to be here in a new capacity as the new assistant director of policy analysis at The Institute but most importantly I'm delighted to be introducing Congressman Blake Moore who's with us this afternoon Congressman Moore represents Utah's First District he joined Congress in 2021 it is an advocate for inclusive pro-growth and aspirational principles the congressman currently serves in the house Ways and Means Committee where he sits on the healthcare Social Security and work and Welfare subcommittees he also serves on the house budget committee before being elected to congress Congressman Moore worked for small businesses and in the Foreign Service he has expertise in education Financial Services Public Policy Health Care Transportation Supply Chain Waste Industries and employee ownership president in his first term Congressman Moore was the most successful freshman member of Congress in terms of legislation passed with four bills signed into law by President Biden and several more pass-through committee and of course he's here with us today for a strong leadership on employee ownership as one of the lead sponsors of the employee Equity investment act and I'd be remiss not to also say that the congressman I understand is the starting center fielder for tonight's Congressional baseball game so thanks for joining us on the big game day congressman thank you Jack uh all you need to know about Jack you got to read my bio uh my my legislative team oh my goodness Sarah okay this is so great to see you I look forward to chatting with you later oh I did not expect to see you sitting back there that's really exciting um my my legislative uh ate on this particular issue walked over and said uh remember his name's Jack and he's the policy wonk on this so he gets the details of this and that is so in critically important it's the actual details that make this particular piece of legislation that we're working on with Senators Mount Holland Rubio and then uh my good friend and he probably plays in the Outfield too Dean Phillips for the for the Democrat team to tonight you can see there's a big focus on the baseball game today a little buzz in the air uh the the the the concept of this in the actual policy of it is what continues to bring Congress together and I'm hopeful that we can drive this forward I don't know how you argue against something like esops at the root of what every single talking point is from a Democratic or republican standpoint is growing the middle class being able to provide a good positive future and a strong Workforce right and um nothing does more for in my opinion a strong retirement given the constraints that we have folks we have a massive problem from 1935 when there was 45 workers paying into one beneficiary system and Social Security we have a very different system now we have far fewer workers in a large retirement class like we have to be willing to think about what's best for the future and there are amazing individuals that have led companies that have led industry that as their legacy they want to make sure that they can have their legacy live on and how do you do that by creating a strong in most cases private sector organization is going to give ownership to that brand new worker that Frontline worker that person that has never been able to have do anything other than live paycheck to paycheck and just burn out all of their income on all of the things that that they have to provide for to be able to go to work fundamentally change what we read about in all those texts that talk about the importance of equity and the importance of ownership and this is giving that opportunity because it doesn't always exist and so if we as members of Congress and lawmakers truly want to address income inequality like this is at the root in the in the in the foundation of it and that's why I'm so excited and and supportive of it uh and and it takes individuals like Jim Sorensen who's in who's back in Utah who has been successful who has looked towards the future and turned his success into success for so many others and that's what I that's what I love about individuals that uh you know that I get to interact with that that are inside my network because they have taken positive experiences in either a professional life a social uh entrepreneurship type of work and they're trying to promote that in the best way possible and so it's absolutely an honor for for my team and I to be able to to dig into this particular issue and you know we got a little bit of pushback on the very first time we tried last term we were late in the term uh it wasn't we weren't out ahead of it and this year and I'm glad to be able to share with this team because it's highly relevant for today uh with the new chairman of the small business committee I looked at my team and I said Roger Williams is now the chair um I'm the starting center fielder he's the coach he needs to make sure we have a strong Outfield because otherwise we don't win and I'm going to let I want esops as a part of the the plan and I want them to be okay with letting this go forward so let's go ahead I'm learning how to use leverage in this place of Congress I said I'm not going to be your starting center fielder unless we can get esops through let's go we're working on it there are so many amazing positive aspects to this uh but but the root of it it just makes sense and it can fulfill any talking point any politician in these walls want to talk about in growing lower income and middle class Americans providing opportunity for them and ensuring their retirement because it's it's every single American out there is scared right now they're worried about what's to come they're they're sensible they understand that if there is an insolvency pending with Social Security and that's just math that's not rhetoric or politics they that we need to make sure that we're thinking ahead of this and this is an opportunity a decade even more before this really gets to that point that we have an opportunity sincerely to address it in a way and I go and I and I interact with companies in Utah that are doing this and there are so many positive uh outcomes that have come from it with really good strong positive employee retention which is key uh to show for it and so I'm I'm thrilled to be somebody that can Champion it and uh we'll do whatever I can and my team is is know this is a priority so thank you all I'm gonna go