The Life-Changing Magic of Turning Employees Into Shareholders

The United States—almost by accident, and almost alone among the world’s nations—has created an innovative, practical structure by which a company’s employees can own the business they work for. Today, according to the nonprofit National Center for Employee Ownership, about 7,000 U.S. companies are substantially or entirely owned by their employees. These are not tiny co-ops or buyouts of bankrupt firms; they are conventional profit-seeking businesses, most of them thriving. The companies employ about one out of every eight private-sector workers. They can be found in every state, in nearly every industry, and in virtually every size category—from the giant Publix supermarket chain to small engineering firms.

Research shows that companies with significant employee ownership grow faster than their conventionally-owned counterparts. They typically pay more, and they are less likely to lay people off in a downturn (let alone move all their operations overseas). Some have made their frontline employees and middle managers remarkably wealthy. A recent report highlighted the experience of a woman named Cathy Burch, a veteran hourly employee of Boise-based Winco, another grocery chain. Burch owns close to $1 million in Winco stock—and it didn’t cost her a dime.

Many of these companies seem to encourage a more responsive and more cooperative management style in the workplace, one reason they are disproportionately represented on the various “Best Places to Work” lists. Fortune reporter Christopher Tkaczyk, who worked for five days at one of Publix’s Florida stores, describes his coworkers as “pleased-as-punch, over-the-moon, [and] ridiculously contented.” Publix’s voluntary turnover rate is 5 percent, compared to the retail industry’s average of 65 percent. It has never had a layoff in its history.

When employee ownership of this sort does make it onto the radar, it is one of the few ideas that liberals and conservatives seem to agree on. The left favors spreading the wealth. The right wants to create more capitalists. With employee ownership, they can both get their way. In April of this year, the House Small Business Committee held hearings on a bill that would support the idea with technical assistance and other incentives. Committee chair Steve Chabot, a Republican from Ohio, decided after hearing testimony that he wanted to join the 60 other cosponsors of the bill, who came from both sides of the aisle. Representative Janice Han, a Democrat from California, told The Hill’s Naomi Jagoda that while politicians from both parties are talking about income inequality, “it’s been really amazing to hear from our witnesses today that proved that you don’t have to choose between people and profits. You can follow business practices that actually promote both.” A June poll found that 68 percent of those surveyed “support the concept of companies being owned by their employees.”

With support like that, why haven’t more political leaders climbed on board the bandwagon? One reason may be the terribly unsexy details of the employee-ownership structure. A company creates a trust called an employee stock ownership plan (ESOP), which is technically a retirement program and is governed by a host of government regulations. The ESOP buys a chunk of shares from a company owner, often by taking out a loan. As it repays the loan from the company’s revenues, it credits the shares to the retirement accounts of individual employees. They can cash out the shares’ value when they retire or leave the company.

It’s too bad that the specifics are eye-glazing, because an ESOP’s effects are sort of magical. Owners get full value for their shares. Employees get stock without spending their own money. Unlike a distribution of stock options or an outright gift of stock (as in the recent example of Chobani, the yogurt maker), employees as a group retain ownership of the company through the ESOP. Often, the ESOP begins by buying a minority of shares and expands to majority or 100 percent ownership over time.

Another factor is that ESOPs had a rocky beginning, which for a while made them appear sketchy. A few widely publicized companies set up ESOPs purely as defenses against hostile takeovers. (Polaroid, for example, was accused of doing just that, leading one influential columnist to label ESOPs a “hoax.”) Some other companies played fast and loose with stock valuations. But the cowboy era is pretty much over; today, the U.S. Department of Labor keeps a close eye on every such plan and takes offenders to court when necessary. “Enforcement is congruent with the purposes of ESOPs,” said Timothy Hauser, an official in the DOL’s Employee Benefits Security Administration. “We do it to promote the interests of the workers that ESOPs serve.”

ESOPs already benefit from several tax breaks. Company owners who sell at least 30 percent of their stock to an ESOP can defer or even eliminate taxes on their capital gains. Money used to buy owners out is tax-deductible, and ESOPs that own 100 percent of the shares pay no income tax. Other incentives are under consideration. But a visionary politician could rescue this idea from the murk of tax legislation and put it on a whole new plane.

Imagine, for example, that the next president outlines a major new policy initiative, maybe dubbed a true Ownership Society (unlike George W. Bush’s half-baked version). The program’s hallmark is companies that are substantially owned by their employees. Administration officials fan out to identify and celebrate exemplars like Publix. The federal government offers preference in its purchasing to employee-owned companies, just as it does now for small businesses owned by minorities, women, and disabled veterans. An Office of Employee Ownership in the Commerce Department comes up with programs to stimulate more ownership; it also funds state-level centers of research and advocacy (which already exist in Ohio, Vermont, and a handful of other places).

So far, Hillary Clinton has embraced profit sharing but hasn’t said much about ownership. Donald Trump hasn’t talked about either one, though the 2016 Republican platform does endorse “employee stock ownership plans that enable workers to become capitalists.”

What an opportunity they’re missing: Average household income for the lower four-fifths of the population has risen less than 15 percent in the last 40 years, while income at the top has soared. The next administration faces no greater economic challenge than boosting the fortunes of the poor and the vast middle class. And employee-ownership could be just the tool it could use to do so.