Scaling Employee Ownership: Policies or Markets?

What comes first, public policies, institutions, or markets changes?

By Sarah Stranahan

Those of us seeking to advance employee ownership face a bewildering array of legislative initiatives and competing advocacy priorities. At last count, there were at least six Senate bills dealing with employee ownership. They range from Senate Bill 1082, which would create an Employee Ownership bank with a $500 million-dollar loan fund for ESOPS and coops, to Senate Resolution 295, designating October 2017 as “National Employee Ownership Month.” There’s also Senate Bill 488 the “Encouraging Employee Ownership Act,” which looks like employee ownership promotion but would actually deregulate corporate SEC disclosure rules.

Do we rally behind these bills? Which ones? As we seek to scale employee ownership, should we focus our energies on enabling policy changes, building powerful institutions, or developing market drivers for the economic outcomes we want to see? What comes first, public policies, institutions, or markets changes?

History demonstrates that policy alone is a fragile foundation for economic transformation.

Of course, there is no simple answer to this question. History demonstrates that policy alone is a fragile foundation for economic transformation, since policies come and go with shifts in the political climate. For example, Britain’s Labour Party incentivized industrial democracy in the 1970’s, resulting in hundreds of employee owned firms. However, the institutional structure wasn’t strong enough to survive on its own when those supports were withdrawn under Thatcherism, and most of those firms went bankrupt or were bought up by traditional capitalist enterprises.

While Conservative Governments in the U.K. were keen to encourage employee shared ownership, their support for ESOPs was somewhat tentative. The association between ESOPs and industrial democracy, promulgated at the time by the Labour Party, did not endear them to Thatcher. These governments were keen to promote shared worker-ownership; there was a wariness of worker management of firms. Worker cooperatives were viewed with suspicion because of perceived difficulties in developing effective management. As a result, centralized government support for creating and maintaining worker-owned businesses in the U. K. was wound down.

In the U.S, supportive public policies have also helped incubate, scale, and protect markets that nurture employee ownership. For example, the solar industry benefited from federal and state tax incentives that expanded the domestic market for solar. That in turn helped create economies of scale that lowered the cost of solar panels to the point where they were competitive with fossil fuels. As a result, the solar panel market has it gained an increasing number of stakeholders, including manufacturers, national suppliers, local installers, utilities, and state legislatures. With this institutional strength, even if policy supports were to be withdrawn, the industry is unlikely to collapse. In this environment, employee ownership of solar firms has taken off.

There is no such thing as a pure market operating in a neutral policy environment; all economies are political economies.

There is no such thing as a pure market operating in a neutral policy environment; all economies are political economies. When market forces grow powerful enough to create a set of stakeholders, like gun manufacturers, or cable companies, these stakeholders create institutions like trade organizations and research centers, that can exert political and cultural power to protect and advantage their economic interests.

These institutions sometimes prove more durable and resilient than the economic and political moments that spawned them. For example, the US domestic oil and gas industry flourished in the mid-nineteenth century under generous depletion and depreciation allowances that were designed to attract investors to this risky sector. Policy support for drilling and exploration resulted in the development of additional infrastructure, like pipelines and electric utilities, which brought additional investors and institutions dependent on hydrocarbons. This expanded group of stakeholders built institutions and political power that has, thus far, been able to defend their interests.

Like the oil and gas industry, employee ownership enjoys significant tax advantages bestowed by the Employee Retirement Income Security Act of 1974 (ERISA) and over twenty other U.S. laws. Worker coops have the subchapter T exemption, which, though less robust, is also a tax advantage. Over the years we have also been able to measure and document the many benefits of employee ownership. Employee owned businesses are more productive, more profitable, and more resilient. They produce less wage inequality, better retirement income, and more continuing education. They also have lower turnover rates and better employee family and health outcomes. But despite all this performance data and these policy supports, the employee owned sector has not grown large enough to displace traditional models of ownership.

[T]he employee owned sector has not grown large enough to displace traditional models of ownership.

Why is this? There are several theories about what is inhibiting the expansion of employee ownership. Some point to lack of awareness and understanding of the option of employee ownership; others focus on the duration and complexity of ESOP and coop conversions; still others point to the comparative disadvantage employee owned businesses have raising capital for growth and expansion. One clear obstacle to scaling employee ownership is that the primary agents for creating new ESOPs, are business owners who are geographically dispersed and politically splintered, resulting in a weak and disorganized market.

One hypothesis The Democracy Collaborative is researching is that more robust capital markets for employee ownership could help overcome this owner or agency problem and accelerate the scaling of employee owned businesses. Despite the fact that ESOP companies have stronger than average earnings, there are still only a handful of funds dedicated to investing in employee ownership. As more and larger institutions and foundations are investing for social impact, is it possible to connect mission driven impact investors with businesses that are good candidates for employee ownership?

Building better market infrastructure may be one critical step for scaling employee ownership, but it is not a silver bullet. We cannot afford to neglect the policy and institutional environment around those markets. State and municipal supports for employee ownership in Vermont, Ohio and Indiana, and in cities like New York, Oakland and Portland, are supporting education, loan funds, and technical assistance for employee owned businesses. Trade organizations like the National Center for Employee Ownership, the US Federation Worker Coops, and the Employee Owned S Corporations of America play critical roles as clearinghouses, conveners and public advocates. We also need to support ongoing research and education from organizations like the Beyster Institute, and technical assistance from experienced providers like ICA.

So yes, we do need better public policies, stronger institutions and much better market infrastructure. If we can walk on two legs, we can create a large and powerful employee-owned sector that redresses some of the structural inequality in an economy that advantages owners over workers. We can keep jobs and wealth in communities and challenge the political dominance of absentee shareholder-owned profit-maximizing corporations.

Sarah Stranahan is a Senior Editorial Associate at the Democracy Collaborative.