Employee Ownership: A Homegrown Strategy for Volatile Times

Maybe it’s no surprise that businesses owned by their employees cut fewer jobs than traditional ones during the last recession. The average job loss for these companies was about 2.5%, according to Governing’s Mark Funkhouser, while the average loss for all U.S. companies was about 12%. But that’s not all: employee-owned companies grow about 2.5% a year faster than the average company, and their employees receive about two and a half times as much in retirement assets as other employees, Funkhouser added.

photo: squarespace

Exactly how do employees come to own a company? Many do so through an employee stock ownership plan (ESOP), “qualified retirement plans that are invested primarily in the common stock of the sponsoring company.” Preparing these plans can be daunting, though. “The capital needed for an ESOP is generally supplied through debt, and the owner has to pay for an independent appraisal of the value of the business.” The employees’ legal trustees then have to sign off on the valuations.
The challenges in preparing an ESOP might discourage a business owner or his or her employees considering an employee buyout. And that’s where government could step in, Funkhouser states. Among other things, government could cover some of the appraisal costs, “which would be a small fraction of the billions that governments now pay in tax and other incentives aimed at job creation and business retention,” he observes.

The consequences of major demographic changes also support this approach. “Thousands of baby boomers are turning 65 every day, and many of them are business owners looking to sell out and retire. When the sale is to a competitor, a larger corporation or an out-of-state company, there is usually job loss. With conversion to employee ownership, the workers keep their jobs and the community keeps the company,” Funkhouser states.

So far, only Ohio and Vermont promote and support employee ownership, but interest is picking up, the Center for Employee Ownership told Funkhouser. 

The challenges facing an employee-owned company do not end with the ESOP. A Houston Chronicle article summarizing the advantages and disadvantages of such companies points to the tension that could arise between the staff managing the company and the employee owners:

When the staff understands the operations and take over the production or service, the employees could fail to see the overall business plan and mission of the company . . . [and] may fail to understand the reasons for an owner’s refusal to infuse more cash into the operation. Employees with the power of daily command may feel the owner offers less practical input since the staff has a greater understanding of company operations.