Why Employee-owned Companies Are Better at Building Worker Wealth

This is Dollars and Change, a podcast brought to you by the Wharton School's Environmental, Social and governance Initiative. In our work and on this podcast, we explore the power of business to overcome the greatest challenges of our time. Welcome to Dollars and Change. I'm Katherine Klein, and I am delighted today to be speaking with Corey Rosen. Corey is the world's leading expert on employee ownership. He's the founder and now a senior staff member at the National Center for Employee Ownership, and he's the co-author of a new book called Ownership Reinventing Companies, Capitalism, and Who Owns What. And I got to say that this is a really just a very enjoyable stimulating book to read, exceptionally well written. So anybody who's thinking, wait a minute, this could be a dry topic, you know, I, I beg to differ. This is, this is a lively and really engaging book. And anybody who knows me really well knows that that kind of preys on writing, uh, from me means a lot. So Corey, welcome. It's great to talk to you. Thank you, Katherine. It's really great to speak with you as well. Great. So before we dig into the details, I thought I would ask you to uh give us the, the elevator pitch for employee ownership. What's employee ownership and why do we need more of it in this country? Well, you know, we're often looking for that idea that's at the intersection of it works, and it's politically possible. And there aren't very many ideas that are at that intersection anymore. We know employee ownership works, because there are extensive data and numbers of studies. That show that the employees in these companies. have substantially greater wealth than employees in comparable companies. We know that these companies perform a lot better. We know that they lay people off at dramatically lower rates, 1/3 to 1/50 of other companies. So you have employees with retirement accounts that are about 3 times that of comparable employees in companies that have retirement accounts, and 50% of the private sector workforce is in no retirement plan at all. So the median account balance for an employee in a private sector company is 0. So we know it works on the wealth accumulation. We know it works in reducing layoffs. We know that the companies perform consistently better after setting up a plan. That means their communities prosper more as well as more money is reinvested. But this is not just some kind of idea for, you know, the, the occasional company or the altruistic owner. This is an idea that has been supported by Republicans and Democrats since 1973. Congress has provided significant tax benefits. For these plans, and every bill at the state and federal level. That has been introduced to encourage employee ownership has passed unanimously. So it's an idea that works politically. It's an idea that works economically. But it's not an idea that people are paying much attention to. That's a lot to work with there, uh, and a compelling case that this employee ownership thing is something that we ought to uh take uh take much more seriously. I suppose we should say at the outset. You know, what, what we're talking about, right, is employees owning part or all of the company they work for. And not just executives, but the rank and file, uh, typically 100% of the employees after a year or so of employment are now owners of the company. So. As you, you kind of hinted that um one of the, the thoughts people might have when they hear about employee ownership is That's for weird companies. That's for I don't, you know, lefty companies, socialist companies, idealistic companies, that's not for any company I've ever heard of or I know. I think you're gonna tell us, well, that's a mistake. So counter that argument. What are the examples of companies you might have heard of? A lot of people think, oh, employee ownership, it's the local worker cooperative coffee shop, and there are certainly those examples. But it's also 7 of the largest 15 engineering companies in the US are 100% employee owned. It's also public supermarkets, one of the largest supermarket chains in the United States, as well as several other very large supermarket chains like the rapidly growing Winco in the Northwest. So it's not some peculiar idea that's limited just to, as you say, some left wing social activists. In fact, many of the companies that are employee owned. are amongst the leaders in their particular industries. WL Gore Associates, the makers of Gore-Tex, for instance. And that's because the variety of ways for employees to become owners. The one that we really highlight the most in the book though, is the employee stock ownership plan or ESOP. There's about 14 million participants in these plans. And they're particularly attractive to owners of closely held companies looking at moving on. And of course, with the silver tsunami, that's a lot of people. They could sell to private equity, they could sell to a competitor, or they could just liquidate. None of these options may be very appealing for people who want to preserve the legacy and culture of their company. An employee ownership plan because of these tax benefits. Offers a very appealing way for these owners to transfer ownership to their employees. And I should say, in these plans, the employees are not buying the stock. That's not how they work. What happens is that the company borrows money typically, it doesn't have to, but it can borrow money to buy the shares of the owner, and the company repays that loan out of the future tax deductible profits. That the employees help to create. It's not different than what, say, a private equity firm does when they go by a company and borrow money. And pay it back with the future profits of the company they just bought. It's just that private equity means a handful of people get the benefit, and employee ownership means everybody does. So let's, um, so you mentioned ESOs, employee stock ownership plans. Let's, let's unpack those a little bit. And, you know, you correct me where I have this, this wrong, but my understanding, as you said, is the company is setting up a trust. If I'm an employee and you're an employee of this company, we are getting, um, ownership shares in the company that vest over time. And we get That amount of the stock that we're holding proportional to our salary. So, you know, if I make twice as much as you, I'm getting twice as much stock. Usually, uh, you know, how much money are we talking about? We can talk about it in money, we can talk about it in dollars or as a percentage of salary. But what's the size of the benefit that employees are getting? So one thing to note is there's a cap on the maximum amount of salary that counts when you make these allocations. It's currently $290,000 a year. But you're right, if I make twice as much as you do, then I get twice as much of the allocation. And typically, some companies are flattered. But The typical ESOP company contributes about 6 to 10% of pay per year. Into the employee's account each year. It can be as high as 25% and there are certainly companies that do that. And there for various technical reasons, there are additional allocations that may go to employee to the employees on top of the contributions the company makes. So these contributions are made every year and allocate more and more shares to employees as they go forward. Now, it's it's important to note. The people worry that, well, that's in lieu of what the company might put into another retirement plan. And typical companies put a match of up to, say, 50% of what employees put into a 401k, with a cap of no more than 3% of their pay going into the 401k. But, it's pay to play. You don't get anything if you don't put something in. It's skewed towards higher paid people because they put more in. And a lot of employees just can't participate in them at all. ESOP companies, by contrast, it's not pay to play, it's not based on what you put in. It's much more fair to lower income uh employees and other plans are. And these companies are about or somewhat more likely to have a secondary retirement plan that's diversified than comparable companies are to have any plan at all. So it's not really accurate to say theops are replacing other plants because they aren't. They are because they're not, they're saying. Right, they're adults. Right, and you made a points in the book that as I was reading about, you know, contrasting ESOPs with 401ks. There's some basic facts about 401ks that I'm a little embarrassed to say. I don't know that I fully understood and grasped, and I just want to underscore those because they're so important to contrasting this with an ESOP. You know, as, as you say, in order to get money out of the 401k, I have to put money in and the company is. Matching it. Um, and that therefore, a lot of lower income, lower salary, lower paid employees don't participate in a 401k at all. So while the argument is, hey, a 401k is likely to be invested, uh, more broadly, and that ought to be safer for people. I think what you're saying is, a very large percentage of employees don't have a 401k at all. That's right. About half the workforces, I said in the private sector, so excluding government. has no retirement plan at all, that either the company doesn't offer a plan, or they don't participate in it, and that is very much skewed towards lower income employees, people of color, and single women. ESOPs by law, can't exclude people because they don't put something in. So, yeah, you know, 401ks are an almost accidental. Program that they weren't ever specifically legislated, they were created by a pension adviser, and they became the norm. And they have a lot of advantages. I'm not against 401k plans, but in terms of creating a truly equitable retirement system, they're a failure. Mhm. I mean, and when you give us statistics like half the people who work, you know, in business, outside of government have no retirement benefit at all, it's just sort of put things in in perspective. So sticking for a moment with some of the nitty gritty of an ESOP and how it works, a company that sets up an employee stock ownership plan is giving stock to all of its employees that that benefit is vesting over time. When, when do I as an employee Forget to actually get my hands on that money? Is it just a retirement plan? How should we think about, you know, this employee ownership in this way as a wealth builder, but when do I get to use that wealth? So, it is legally a retirement plan. It's governed by the same law, the Employee Retirement Income Security Act. As pension funds and 401k plans, and so on. And the way the law works for ESOPs is After you leave the company, if you leave prior to death, retirement, or disability, the company has to start distributing your account to you not later than 5 years after that event. If it's for one of those other reasons, like, most commonly retire, then it starts one year after you leave. So you get A notice from the company saying it's time to get your distribution. And the company will typically write you a check for the value of your shares. In theory, in some companies, employees could hold on to the shares, but in private companies there's not much reason to do that, obviously, because your market is the company. There are a lot of participants in ESOPs and public companies. Uh, so, public companies typically have about 3 to 5% of their shares owned by employees through ESOPs. And in those companies, once you leave, you typically get a distribution right away, and you can do what you want with the the shares. It's a public market, so you can go ahead and sell them or keep them. And what do we know about how much people actually, you know, the average employee might have an EO? So one way to look at that is to look at the snapshot, which says, what's the mean value of assets held in an ESOP. We just did that in a massive study this year because you can get these data from the government, from government filings. So it's not a sample, it's the whole universe. And the mean was $132,000 in the ESOP, plus about $63,000 in the 401k. That compared to comparable companies that had a 401k that had about $67,000 in their 401k. The ESOP was 93% from company money. The 401ks were about 33% in both cases. So that tells you what the mean is, but that includes people who've been there for 2 years and 20 years. Right. If you look instead at, well, what do you think most people are going to get when they actually leave if they stick around? And typically, it's going to be after about 20 years, about 4 to 10 times your current salary in distribution, albeit there, I was talking to a company this morning, they have 600 or so employees, they have 50 millionaires, they've already paid out. It's a manufacturing company. So you make a point in the book to contrast employee ownership with other more common forms of employee ownership because they're, you know, there are not that many employee owned companies, even partially owned employee owned companies in the US today, and, and I, and I was, you know, fascinated by the Comparison of what you highlight about publicly traded companies and companies owned by private equity, and you have concerns about those forms of ownership, not that you, you know, not that you're arguing in a way that that that those forms of ownership can or should go away. But talk to us a little bit about, you know, what, what gives you pause, what makes you think the ownership system in this country is broken and needs more employee ownership. So there's two ways it's broken. The most compelling way it's broken. Is that there aren't enough owners. Uh, it used to be, people didn't worry so much about that. Well, you'll make enough money from your salary. And you'll have a pension plan that'll pay you out some fixed amount over the course of your life that, you know, will go up in value with some sort of cost adjustment. 50% of the workforce used to be in manufacturing, as far back as the early 70s. And when companies invested more, wages would go up. When they bought more capital and people were more efficient, wages would go up. Well, that relationship broke. Around the early 1970s. And real wages have been stagnant over that period, while returns to capital investment have gone up about 8% per year in real terms. Now, the Dow had 3 digits in 1973, and now it has 5. At the same time, wealth is increasingly concentrated. 3 families in the US own more wealth than 90% of the rest of the population. Wow. It's an astonishing number. And The rest of the population is saying, you know, 50% says they can't lay their hands on $1000 in an emergency. The large majority of employees say they're not confident they have enough money to retire on. And they're right about that. So, That system only gets fixed now because the way that wages, there doesn't seem to be much hope that wages are gonna start rising faster in any meaningful way than the cost of living. It only gets fixed if people can be owners too. And it's not realistic, given what's happened to wages, to think they're gonna buy their way into ownership. I mean, there's only a couple ways that you can become a wealthy person. You can start your own business. Not many people are successful at that. You can save lots of money, that's harder and harder to do. Or the best choice of all, of course, is to choose your parents wisely. And that's, that's a choice a lot of people don't make. So, that's not working. So that's one way that ownership is broken, is that there's not a way for people practically to become owners, and it's really essential in today's economy. Second way it's broken is that the main systems of ownership. Have a an inborn bias against sustainability. So public companies, when we think of people owning public companies, your ownership in a public company is more like your bet on a horse at a racetrack. You're not really investing. In fact, they're not using your money to buy capital. They're buying more shares back than they are raising money through selling them. So, that's not real ownership. The mutual funds and pension funds who own public companies have a lot of institutional reasons not to be active investors. And in fact, most of their trades are made by algorithms, so that they literally are owning shares for fractions of a second. CEOs of these companies have very short tenures. And so their focus and the market's interest is on what are you doing for me in the next quarter or less. Mhm. So that system really Puts a premium on short-term thinking. Private equity has a somewhat longer time horizon, 3 to 7 years. But they too are looking to maximize short-term profits so they can sell the company for more than they bought it. And one of the results is that the the biggest research project on private equity indicates that overall they cost jobs rather than create them. ESOPs create jobs rather than cost them. So those two systems, which account for almost half the workforce, have some really innate problems in terms of ownership. And then closely held companies, that can be great, that can be, you know, family ownership that lasts for generations, but eventually all these companies get sold. And when they get sold, they often get sold to one of the first two groups. Right. Right. Or sometimes even profitable businesses are just shut down. So all these systems of ownership have a role. But employee ownership needs to be at least an equal player at this table for the economy to realize what it it really should. So Corey, you've been at this for a long time. You've been interested in employee ownership for decades and and advocating for this, and you make a really compelling case for the importance of employee ownership and say, you know, and to boot this has broad political support. So what's holding employee ownership back? And I, and I would say, you know, in dollars and change and in in the conversations that I'm, I'm part of that are closely related to these kinds of topics. I would argue that impact investing seems to get more attention. ESG seems to get more attention and publicly, um, you know, public benefit corporations and be certification get more attention. Is this, you know, is this just the nature of that? You know, the, the fad du jour is what explains this or how do you explain, you know, how do you explain the amount of attention employee ownership is and isn't getting, um, and, and then I suppose with it the growth that you are and aren't seeing in employee ownership. Right. In in some ways, you know, there's employee ownership is kind of a stealth phenomena. Uh, if we just if we look at ESOPs, it's 14 million employees with $1.4 trillion in assets. 100 companies with uh that are majority employee owned. have collectively almost 700,000 employees, and the smallest on that list has 1500 employees. So, in some ways, this is a much bigger phenomenon than people realize. It's certainly bigger than, uh, you know, the growth in unions right now, she's not opposed to this, but that's another example of something that's getting a lot of attention. Right. The unionization of private sectors actually declined. So, why doesn't employee ownership, given all these things get more attention? Well, I think part of that is what you mentioned earlier, you know, in the minds of a lot of people, employee ownership is still that little worker owned cooperative. It's not these big companies that are doing this. It also is maybe just a little harder to understand than, you know, we're a benefit corporation or we're an impact investor, and we're gonna invest in a company that produces green energy. Those are easy concepts to get your hands around, but the concept of employee ownership. Particularly through ESOPs, and there are other ways that employees become owners too, but particularly through ESOPs, it involves a bunch of rules and moving parts, and it's kind of counterintuitive. I can't tell you how many times I've talked to a business owner, and I, and the first thing I say is, first thing you need to know is the employees aren't buying the shares. We go through the whole explanation. 20 minutes later, the business owner says to me, I got everything that you just explained. It was great. Tell me when the employees buy the shares. Because just, that's how we think of it. So it's a, it's a tricky thing. For a lot of people to get their hands around. And I think some people think it's almost too good to be true, you're keeping something from us, you know, there must be a lot of failures, there must be a lot of problems, and, you know, it's not right for every company. But It's a lot more practical than people realize. Also in the business advisory community, There's a lot of people who just really don't want their clients to sell to an ESO, because frankly, they can make a lot more money if they can get them to sell to somebody else. Their advisory fees are higher. So I, I think you, you point to really interesting reasons and the you know, why employee ownership is, has been slower to take off or slower to grow than, than, you know, we might have hoped, particularly given this, this kind of track record, and it makes me think there's a, there's a real need for, you know, marketing and storytelling and simplifying around all of this. And as I said, you do a great job in the book and the book is super readable, um. What do you think, and, and we, we need to wrap up, but give us a sense of what you're hoping to achieve with this book and what kind of changes you'd like to see that would accelerate the growth of employee ownership. So, we think that 3 things are really important. One is greater awareness, and there are, for instance, California just passed a bill, well, has to get the governor's signature, so we have to wait for that. But Unanimously passed the California Employee Ownership Act to create a program to increase awareness of this. There is an act in Congress has a very good chance of passing called the Work Act. And it would create funding for 50 state programs to do that. These would be tremendously impactful changes. Second, the financing arrangements for ESOPs, and I don't want to get into all the details here, we don't have time, but for some owners, Some kind of loan guarantee or other support would help get the deal past the finish line, and there are proposals on this as well. These are two Very inexpensive, almost tweaks to the existing system, you know, it's making ESOPs eligible for a lot of the same kind of loan support that states and the federal government provide to all kinds of businesses now. And the last thing It's simply for people to start talking about it. In the UK in 2014, all three parties at the time, the liberals, Conservatives, and Labour, said they wanted to create, and it was a big part of their platform, a John Lewis economy. John Lewis is the iconic British supermarket and department store chain that's employee owned. And they all just gave it that name, and they all made it a big part of their picture. It was front page of the Financial Times over and over again. They passed the law, and it's growing much faster there than it is here. And part of that is just because their financial press and their politicians talk about it a lot. It's just not a big change. It's not costing anybody anything to do that. It's certainly not costing them politically. Got it. Well, we need to wrap up and um I just really want to thank you for for drawing attention to employee ownership and and sharing all you know about this. It's a, you know, as you know, I've long been interested in this topic as well, and it's great to revisit it for me and have this, you know, have it, have it reinforced what a powerful mechanism this is. I have to say that the stats. you mentioned about, you know, 50% of employees in the private sector having no retirement benefits whatsoever from their, from their work is, um, you know, shocking, uh, and really worrisome. And, um, there's really an awful lot to say about employee ownership that's, that's appealing. So fantastic to talk to you and thank you. Well, I, I can't help but saying that, you know, Katherine was our first employee way back when, when as a graduate student, she came and she was looking to do a project, and we were looking for somebody with her kind of skills, and boy did we hit the jackpot in getting Katherine, and it was a three-year project. And it's fair to say that the research that came out of that project that Catherine led, Change the way people understand what makes employee ownership work better or worse. And it has become the touchstone of now the common wisdom in this field, and it's really affected the way companies are run in a dramatic way. So, uh, so I'm very grateful that we had that opportunity. That's fantastic, Corey. Thank you. It's, it's, it's wonderful to, to hear that. I, I will say, I remember early on as, you know, when I was looking around for a dissertation topic, and I kind of stumbled on into employee ownership, I thought, wow, this would really changed people's lives and would really make them feel differently about their work and their companies and, you know, but, but, and it's true, and it's true. So it's, it's really fabulous to revisit the topic. Thank you. Thank you, Katherine, it was great. Daughters and Change is brought to you by the Wharton School's ESG initiative. To learn more, visit us at ESG. Wharton.upenn.edu.