By: Jack Moriarty

Originally Published In ImpactAlpha’s Policy Corner On March 10, 2022. Read The Article Here.

In an increasingly divided economy, how can impact investors transform the American workforce from wage earners into asset owners?

Impact investors looking for strategies to build a more inclusive and dynamic American capitalism should support public policies designed to accelerate the investment potential of employee ownership.

Building wealth

The case for investing in employee ownership is clear: companies become more productive and globally competitive, workers and their families build household wealth, and regional economies reap the benefits of local investment and high-quality jobs.

Better businesses. There are over 6,000 employee-owned companies in the United States, most of which are privately held through an Employee Stock Ownership Plan (ESOP). Research from the National Center for Employee Ownership shows that these businesses are more productive, grow faster, and are much less likely to lay off workers during an economic downturn.
Steady jobs. A 2020 study by the Rutgers Institute for the Study of Employee Ownership and Profit Sharing and the Employee Ownership Foundation found that majority employee-owned companies through an ESOP were over three times more likely to keep their workers on the payroll during the pandemic.
Retirement security. The average employee owner has over double the retirement assets of a conventional worker. Most employees do not pay out of pocket for the stock: the loans used to purchase the business on behalf of the employees are paid back over time through company profits.
Inclusive economy. Employee ownership is an especially powerful strategy for building the assets of low and moderate-income workers including workers of color as well as workers without a college degree.

Silver tsunami

A record number of baby boomer business owners are now reaching retirement age and will eventually sell their company. Their most obvious options are to sell to a competitor or financial buyer that may eliminate local jobs and investment. However, many owners who might prefer to preserve their legacy by selling to their employees cannot afford to do so.

Selling to employees typically requires the seller to finance 60%-75% of the transaction with a subordinated seller note that is paid off gradually over five to 10 years. In contrast, financial and strategic buyers offer a significant liquidity event at closing.

In order for employee ownership to become a financially appealing exit option for a much larger universe of business owners, investors must partner with policymakers to create more investment opportunities that level the playing field for ownership transition.

Here’s where to start:

Call to action

Loan Guarantees. The seller liquidity problem poses a key barrier to the growth of employee ownership. Congress can mobilize private investment to solve this problem by reducing the reliance on seller notes to create new ESOPs and worker co-ops.

A new facility in the SBA Small Business Investment Company (SBIC) program could partially capitalize a cohort of structured equity funds specializing in employee buyouts – at zero subsidy cost to the taxpayer. This facility could also accelerate the growth of existing employee-owned businesses by lowering their cost of capital.

Federal credit enhancement would allow more workers to purchase privately held businesses, just as it has historically allowed more families to purchase homes. Last fall, the U.S. Treasury Department took a positive first step by allowing states to include employee ownership as an eligible use of State Small Business Credit Initiative (SSBCI) funding.

Opportunity Zones. Congress should modify the Opportunity Zone statute to allow qualifying funds to adopt an employee ownership investment strategy using structured equity.

This fix would allow for the creation and retention of high-quality jobs that build wealth for workers in low-income communities. The loss of local employment due to business succession threatens to further exacerbate geographic inequality.

Human capital management disclosures. Given its demonstrable link to growth and reduced workforce turnover, employee ownership is a financially material component of human capital management. However, we know very little about employee stock ownership in public companies due to limited disclosure.

In response to the SEC’s upcoming revised rule on human capital management, investors should ask for disclosures of:

The number of shares held across all ERISA plans;
The number of stock options/grants and restricted stock units issued during the prior fiscal year, plus the total number outstanding;
The percentage of grants held by employees beyond the named officers, including a description of the formula used to allocate the awards; and
Policies describing which employees are eligible for stock compensation, and the percentage of employees actually receiving the awards.

These disclosures would allow investors to better integrate broad-based ownership data into their investment strategies.

Remove barriers for minority and women-owned businesses. Businesses that currently receive federal contracting preferences as a minority- or women-owned business risk losing their certification if the founder sells a majority of the company to employees.

Congress can remove this barrier by providing a pathway for existing minority and women-owned businesses to retain their certification following a sale to employees. This fix would enhance the ability of employee ownership to address racial and gender wealth gaps by allowing some of the most inclusive businesses to become employee-owned without penalty.

Employee ownership is an essential and bipartisan part of any strategy to build a more a more broadly prosperous American economy.

Impact investors can lead the way by working with policymakers to mobilize investment that turns employees into owners.

Jack Moriarty is the founder and executive director of Ownership America, a policy organization committed to turning Americans into owners.

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