An Opportunity to Spur Deep Structural Change

Alternative Ownership Enterprise
May 25, 2022

This article originally appeared in Fifty by Fifty as part of their series on the impact of private equity on the employee ownership field.

In 2019, Transform Finance published Investing in Employee Ownership: Financing Conversions through a Private Equity Fund Model. The report proposed a private-equity-like structure for financing employee ownership conversions to Employee Stock Ownership Plans (ESOPs). In addition to financing the conversion, the investment team would work closely with the business to build an ownership culture that would empower employees and improve business outcomes. The model centered workers, particularly people of color and low-wage workers, and proposed guardrails to avoid extractive deals that would leave employees with an overleveraged business for years to come. As part of Fifty by Fifty's series on private equity, Employee Ownership News asked Executive Director Andrea Armeni if traditional private equity could be trusted as it entered the employee ownership space.

A positive development
I’m quite positive about Ownership Works; I think it is important to embrace the occasional openings among mainstream economic players that are aligned with work that is aiming to be more transformative.

What Pete Stavros of KKR has been doing for the last decade in experimenting around worker voice and employee ownership—and is now expanding through Ownership Works—is certainly better than how traditional private equity has negatively impacted workers and has extracted wealth.

Ownership Works can spur conversations about who is creating the value and who should capture it.

If the recognition of worker contributions, the remuneration of workers for their efforts through profit sharing and ownership stakes, along with a decrease in leveraged bets that place the risk of blow-up on the workers, were to become more mainstream through efforts such as Ownership Works, this would be a great result.

Does it go far enough? Probably not, but it is a good beginning given the starting point of traditional private equity. Partial ownership is better than no ownership and for the impacted workers the difference can be significant. From the perspective of an hourly worker, let’s be honest, an asset building ownership stake may matter more than a macro contribution to economic democracy.

A door opening, not a comprehensive solution to wealth inequality
At the broader level than the workers directly affected, I am unpersuaded by the framing that this initiative will tackle wealth inequality. If workers receive, let’s say up to 10 percent of the company’s equity, while the private equity owners reap 90 percent of the value, the latter will continue to get richer at a much faster rate than the employees. In this way, the wealth gap continues to grow, even if at a marginally lower rate. So this is not a comprehensive solution to the deep inequalities in our economy.

Let’s recognize it as the door opening that it is, in an industry that is otherwise unfriendly to workers and economic democracy. Ownership Works can be a conversation starter in the industry and spur conversations about who is creating the value and who should capture it; this would make the initiative potentially quite transformative.

We pointed to the potential for private equity to be aligned with worker interest and distributed ownership in the research and report from Transform Finance that proposed a model for employee ownership conversions based on private equity-style acquisitions. We were careful to highlight, however, the need for guardrails to ensure that conversions financed by private equity would not leave employees with overly leveraged businesses and focused on businesses with low-wage workforces of color. This is doable and it is being done, but it may require investors to accept moderate, or at least less rapacious, returns.

The real concern here is whether mainstream initiatives – well funded, with good media coverage, with big-name coalitions – end up taking wind out of the sails of more transformative efforts.

Opportunity for the field
There is often a valid suspicion among more progressive practitioners of efforts that come from mainstream players who have been responsible for wreaking havoc. I am sympathetic to that stance and at the same time I do welcome all efforts, mainstream or not, that move us in the right direction. There is a clear upside to having such big names pushing for a greater role for employee ownership in the economy. The real concern here is whether mainstream initiatives—well funded, with good media coverage, with big-name coalitions—end up taking wind out of the sails of more transformative efforts.

This concern can be easily turned into an opportunity: the chance for the broader employee ownership and economic democracy field to respond to Ownership Works and similar initiatives in a unified way. These efforts should be leveraged strategically toward deeper structural change. I would love to see a coordinated push to move the more traditional players further along on the path they are already on and be true to their stated goal of fostering more equitable outcomes for workers who have been left behind.

So Ownership Works, with its high level of visibility and the significant talent behind it, opens a door and may end up paving the way for more radical models. But it is up to us to make sure that happens.

Read Fifty by Fifty's entire series on the impact of private equity on the employee ownership field.

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