Inštitut za ekonomsko demokracijo

Winning strategy against capital concentration

Author: Elena Galevska, Head of marketing at IED

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Employee ownership is an old idea that is yet to be widely implemented across developed economies. However, the concept is continuously reinvented and improved. A good example of this is the latest efforts of the Canadian organization, Social Capital Partners (SCP). Before sharing the exciting new approach against capital concentration that they have taken, it is important to understand what the organization stands for.

Founded by tech entrepreneur, Bill Young, who has spent two decades fighting to help out those facing employment barriers after having made a fortune in the 1990s, SCP has tried several approaches to solve the issue. The first phase consisted of direct investments into social enterprises, followed by the second phase of innovative social-finance tools development, and thirdly, the promotion of innovative training programmes for employees. However, most recently, Young and his colleagues have been focusing on enhancing workers’ capital rather than income. This shall increase the prosperity as well as their resilience to economic shocks, such as the current pandemic situation.

Given that people commonly accumulate wealth by holding stocks and bonds, Social Capital Partners realized that numerous problems, such as building long-term wealth, preventing the risks related to ineffective leadership after a sale of a company, and layoffs due to decisions made by investors who are looking for fast paybacks instead of longevity and growth, can be avoided simply by putting more stocks in the hands of employees.

The best part is, besides solving all these important issues, employee ownership leads to better performance of the companies. In the USA, legislation has been long ago passed to encourage companies to transfer to employee ownership without having to use employees’ funds, and they have found that not only are employees paid better, but the firms grow faster and achieve higher profits.

While Canada has only a handful of employee-owned companies, there are approximately 6,400 such firms in the USA, covering 14 million workers, who hold $1.4 trillion in wealth. This is mainly due to the American legislation enabling the shares to be given away to employees rather than sold. Selling the shares to employees doesn’t end the divide between owners and non-owners as they are typically bought only by the elite groups, who can afford to do so.

Hence, Social Capital Partners noticed an untapped opportunity – encouraging the big pension funds to invest into employee share ownership plans, so that their loans can immediately compensate the existing owners for giving up their equity, while the installments will be paid back through the proceeds of the business over a fixed period of time.

Social Capital Partners believe to have found the winning strategy to oppose the wealth concentration present in most countries nowadays. SCP partner, Jon Shell says that demonstrating how employee ownership can generate attractive returns to pension funds, billions of dollars can be moved into ESOPs which in turn will lead to billions more in employee wealth.

Besides reaching out to pension funds to start supporting employee ownership, Social Capital Partners are also lobbying for legislation in Canada to improve so that also lower-income employees can become part of the employee share ownership plans. Following the British example, when the UK government introduced the employee ownership trust in 2014, after which employee ownership grew by 150 %, SCP believe that it is of great importance to have an adequate legislative framework covering the companies that wish to become employee-owned.

When will the legislative change in Slovenia? The IED has prepared a draft for the legislative framework and drafted the generic ESOP model appropriate for the Slovenian companies’ needs. You can read more about it here.

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