In my research on definite-purpose enterprises and stakeholder capitalism, one of the most important themes I have encountered is the transformative power of employee ownership.
Kimberly Jones, president of the 100% employee-owned marketing agency Butler / Till for example thus describes the impact of employee shareholding “Employee share ownership is perhaps the best kept secret in our economy. It strengthens communities, fosters a financially savvy workforce, increases resilience during recessions, and provides great benefits during economic booms. It is an economically wise choice, with several tax and financial incentives to its credit. It also allows employees to think and act like owners, resulting in an engaged workforce, satisfied customers, and lasting financial success which, in turn, benefits the community.
In addition, employee share ownership is an important way to overcome economic inequalities. While I was researching my latest book, Better Business: How the B Corp Movement is Reshaping Capitalism pioneer of sustainable business Jeffrey Hollender, co-founder of Seventh Generation told me: “I don’t think you can be a responsible company without committing to employee ownership, because otherwise your company acts as a means of concentrating wealth”, and that “take this head on, overcome their fears of giving employees access to their financial statements and understand that they are agents of concentration of wealth if they are not committed to employee ownership.”
This is an extremely important point. While there are many ways for businesses to be sustainable and socially responsible, even the best of them, if they are organized with traditional ownership structures (e.g., publicly traded, VC-owned / PE, Family, LLC), they will systematically channel an amount of earnings to these owners and thus only serve to increase the problems of economic inequality that plague our world. So while their products may be environmentally friendly and ethically produced, ultimately, if these companies have traditional ownership structures, they will also contribute to increased economic inequality.
I’ve heard similar sentiments from other large employee-owned companies I’ve written about, including Global Prairie, Fireclay Tile, and King Arthur Flour. So I was very excited to learn a new book on the subject, Create Amazing: Turn Your Employees Into Owners For Explosive Growth by Greg Graves, who recently retired as President and CEO of Burns McDonnell Engineering, an employee-owned construction and engineering services company. I recently had the opportunity to ask Greg about his experience with employee ownership and why he thinks it is important not only for companies, but for society in general. An edited excerpt from our online interview follows.
Christophe Marquis: How did you hear about employee ownership and why did you set up this ownership structure at Burns & McDonnell Engineering?
Greg Graves: In the 1970s, Burns & McDonnell was sold to Armco Steel after two generations of family ownership. In the mid-1980s, the American steel industry was in free fall and Armco made the decision to sell some of its secondary divisions. Burns & Mac management was determined not to be “sold” to another corporate giant and learned that it could eventually become owner again through an Employee Stock Purchase Plan (ESOP).
Significant hurdles were expected, including securing funding, selling the idea to 640 existing employees, and Armco’s conviction to agree to a slightly more complicated but tax-efficient exit. Fortunately for the current 7,000 or so employee-owners, every hurdle was overcome and one of America’s most successful employee-owned businesses was born.
Marquis: What differences has being an ESOP made to employee engagement, engagement and performance?
Fallen down : During my 36 years there, 13 of which as CEO, I have seen the differences on the ground, and they are profound. But luckily, ESOPs aren’t just better for the people who work there, they’re also better for the business as a whole, not to mention America’s competitiveness as a whole. These benefits are not only possible, they are predictable in large part thanks to ongoing research at the Institute for the Study of Employee Ownership and Profit Sharing at the Rutgers School of Business. They found that for almost any business, turning workers into owners will lead to institutional improvements in productivity, turnover, and employee satisfaction. At Burns & McDonnell, we have had years where unwanted senior employee turnover was almost nil.
What leaders should also consider, however, is that workers who become owners will also have increasingly higher expectations for those same leaders. They will have high expectations for the success of their business and will expect their business to become great places to work, not just great places to retire.
Marquis: How can ESOPs be used to address economic injustice caused by wealth disparity?
Fallen down : The inequality of wealth in America has not been so severe since the 1776 version of Europe left by the Founding Fathers. It is unacceptable. In America today, 1% of American families have fifteen times the wealth of all of the poorest 50%. We solved this once. We should solve it again.
There is a lot to consider here, including the non-working poor, access to health care, and most importantly, early childhood education. Certainly, the federal minimum wage should be debated thoughtfully and thoroughly.
Create Amazing offers a third opportunity to the stool … 100 million additional workers have become owners against the 14 million that exist today. This would predictably create American capitalism on steroids and, more importantly, ensure that the success of this greater capitalism is fairly shared with all who made it possible. Create Amazing does not argue for the redistribution of wealth in America. In fact, he is directly opposed to it. Generational wealth must be earned… but it can be earned, one employee owner at a time.
Marquis: What can the government do to promote employee ownership?
Graves: Usually when I get this question I respond quickly… don’t do anything but stay away. In this case, however, there is more and more that the federal government and most state governments can do to help with the formation of ESOPs and pave the way for greater economic justice. Most important, without a doubt, is to streamline the process by which existing private companies can move into employee ownership, including incentives to encourage these transitions and their financing options.
But again, please don’t hurt. Equally important is that the current debate on budget and tax revenues in Washington DC does not have unintended consequences for ESOPs, such as limiting qualified retirement savings or short-term thinking that is taking place. often accompanied by compensation. As with any form of ownership, ESOPs thrive as the economy thrives… but thankfully, in a fairer way.
Marquis: If a business wishes to become owned by its employees, what are the first steps to take?
Fallen down : Always start with Why?
Whether or not we make the big leap towards employee ownership must start by having the right “Why”. Love for your people, American competitiveness, economic justice… all good starters.
After “Why,” there are many sources of information including the ESOP Association, Employee S-Corporations of America, and the National Center for Employee Ownership. Of course, there are also several great books out there on the subject, from academia to senior CEOs. After a lot of reading and probably some soul-searching, my first step would be to hire an excellent ESOP lawyer… the key here is someone who specializes every day in the special fiduciary duties that come with an employee-owned business.
What you will find, I promise you, is that the way forward is clear but not straightforward. In fact, I guarantee you it won’t be easy, but I also guarantee you that it will be worth it. Done well, turning workers into owners will lead to explosive growth… for you, for your business, for our country.