In addition to the Slovenian and Swedish sister initiatives promoting a generic ESOP model, Canadians are also trying to promote the US invention of financing employee buyouts through retained earnings of the operating company.
Our Canadian friends with John Shell behind the helm distributed yesterday a public letter indicating the Social Capital Partners (SCP) are turning the new page and focusing exclusively on financing employee buyouts.
Below is their letter in full.
“It has been a while since we’ve provided an update to our stakeholders, and for that we apologize. While it’s taken longer to come together than we expected, we want to explain our new agenda that’s focused on increasing access to business ownership.
Our journey to ownership
SCP was founded to fight unfair economic outcomes caused by both the “wheel of fortune” and systems that are stacked against certain groups of people. For most of our history, we’ve focused on income and employment: helping people facing systemic barriers find good full-time work. And we’re still passionate about that topic! Our workforce expert, Judy Doidge, continues to support many terrific demand-led employment and training programs. But the unfair outcomes that lead to ever increasing wealth inequality has two components: income inequality and capital or ownership inequality. Over the last couple of years we’ve started thinking more about the ownership side.
Rightly or wrongly, our observation is that a great many of the non-profit or charitable efforts to increase economic opportunity and reduce inequality are on the income side. Public policy also focuses there: universal basic income, tax policy, minimum wage increases, etc. aim to increase low incomes. And we’re supportive of these efforts! But, other than affordable housing, few seem focused on ownership. With asset ownership consolidating in fewer and fewer hands, there just aren’t many people with any real wealth, let alone the wealth needed to manage a crisis such as COVID-19. Finding and developing new ideas to help broaden ownership to more people and increase economic resiliency seems increasingly urgent, so we decided to dig in.
Interestingly, when we started talking to people about this, and framed it as being about wealth inequality, it certainly wasn’t a burning platform for everyone in Canada (“we’re not as bad as the US, amiright?”). But we’re seeing that shift. Not only is there new data that suggests Canada may actually be among the most unequal in the OECD, but COVID-19 has brought that inequality into stark relief. As SCP adviser Roger Martin discusses in his recent book, at some level of inequality, democratic capitalism simply isn’t sustainable. We don’t know exactly what that level is, but based on some recent elections, it’s safe to say we’re getting pretty close.
So, we’ve spent time looking for scalable and sustainable ways to provide accessible business ownership to the broadest possible group of people. And the best thing we could find was employee ownership. Specifically, US-style employee ownership.
US-style employee ownership is a game changer
We know, we know. It’s a bit tough to talk about the US right now. Everything seems a bit…poisoned. But the success of American employee ownership is impossible to deny. US-style Employee Stock Ownership Plans (US-ESOPs) enable owners to sell shares to their workers at fair market value, funded by debt, and at no cost to employees. They are broad-based, requiring shares to be distributed to almost all employees, and not just top management. Since they were established in 1974 a bi-partisan consensus has provided more and more incentives to promote their use. And as a result there are currently about 6,400 employee-owned companies in the US, with 14M employees sharing in $1.4 trillion in wealth. Yep, trillion. With a T. Well-known companies, such as Publix, Gore (makers of Gore-tex) and Clif Bar have significant employee ownership.
One of the great things about US-ESOPs is they’ve been around a long time and have been well studied. It turns out they grow faster, are more profitable, are more resilient in downturns, stay in their communities longer and pay their employees more before you take into account their share ownership. And when you do include their share ownership, US-ESOPs have proven to be a powerful wealth creating engine for many workers who otherwise have no access to ownership. According to one study, employee-owners have 92% more wealth than equivalent employees at other companies and many front-line US employees have retired with $1M+ payouts.
They’re also a terrific succession option for business owners, which is crucial at a time where a majority of owners of private companies in the US and Canada are approaching retirement. Selling to a US-ESOP allows owners to protect the legacies they’ve built, preserve jobs in their local communities where they will continue to live, reward their employees and receive a fair return for their companies. So many wins!
For our Canadian readers, US-ESOPs aren’t the same as the “ESOPs” you’re familiar with in Canada, which are mostly meant for upper management. Nor are they stock purchase plans, which allow employees to buy shares at a discount or funded by company loans. The critical feature that makes them especially useful is that they don’t require employees to have any current wealth, or even any disposable income, to participate and there’s no downside risk for the employee. A few useful references on US-ESOPs are this website, this video, this website, this podcast and this terrific report.
To summarize, US-ESOPs have proven to be scalable and sustainable, and because all employees participate and they don’t pay for their shares, they’re also accessible. This meets all three of our criteria for broadening business ownership.
SCP’s two-pronged employee ownership strategy
So, where do we come in at SCP? In two ways.
First, we are working with major Canadian pension funds to invest in US-based employee ownership. Despite the success in the US to date, there’s still a major gap preventing even more employee ownership growth: a lack of debt capital. But the capital needed is actually a great fit for the investment criteria of pension funds, who are always looking for new ways to invest. We’ve been building relationships with US-ESOP advisors over the last year, and if we can demonstrate how pension money can be used to support employee ownership while generating an attractive return, we think we can move billions of dollars into the sector, resulting in billions (trillions? why not!) more in employee wealth. We think it’s a huge opportunity: more detail on our approach is here.
The second thing we’re doing directly addresses the obvious question: why isn’t SCP doing this in Canada? The answer is simple: we can’t. Canada’s employee ownership environment suuuuuuuucks. Canada provides no incentives to support employee ownership, and provides no corporate structure comparable to US-ESOPs. There are some worker co-ops (300 or so employing about 5,000 people) and some companies have worked very hard to overcome the bad regulatory environment and provide employee ownership anyway (such as EllisDon, Friesen’s, Beau’s and PCL). There are option plans and share purchase programs, but these are generally targeted at upper and mid-management and often used by large, publicly-traded companies (i.e. not broad-based and big miss on accessible). The UK was similar until 2012, when they commissioned a major study that resulted in new rules and incentives in 2014 that have jumped-started EO; employee ownership in the UK is up 150% since then.
So, we’re starting a campaign to change Canada’s employee ownership policies. As we look to rebuild our economy after the very unequal devastation of COVID-19, employee ownership should be an integral part of an inclusive growth agenda. Not only is it proven to provide opportunity for employees to build wealth, it protects local jobs, increases company resilience in downturns and provides an answer for Canada’s coming business succession crisis as baby boomer business owners start to retire. It’s just smart, evidence-based public policy. We have a lot more to say about this, so please look for the launch of our new report “Building an Employee Ownership Economy” on October 27th. We’re going to spend a lot of our time over the next year writing, talking and otherwise nagging about how much we need employee ownership in Canada. We will be calling in favours. Be prepared.
And, while employee ownership provides the fastest way to scale ownership opportunities to people who don’t otherwise have access, it isn’t the only one. We’re also looking for other platforms that broaden ownership opportunities while meeting the three criteria we identified above: scalability, sustainability and accessibility. We’ve been working on a few additional concepts ourselves, and hope to have a lot more to say about this soon. But if this strikes a chord, or if you know an opportunity that fits these criteria, please reach out.
If you made it this far, we get it – it’s COVID and you’ve finished Netflix. Thanks so much for reading!
Bill, Jon and the SCP Team”