Reflections on Kelso Mid-Year Fellows Workshop

January 30, 2024

By Curt Lyon

Earlier this month, the Rutgers Institute for the Study of Employee Ownership and Profit Sharing held their annual Mid-Year Fellows Workshop in Honor of Louis O. Kelso. Researchers of Employee Ownership (EO), along with many practitioners who support businesses, investors, and policymakers to grow the EO space, gathered for dozens of research presentations on the trajectory and impact of EO. 

I attended the Workshop to present on Alternative Ownership Enterprises (AOEs), and left with several reflections on the state of the field, our work, and tensions to work towards resolving in building out this field. 

The Big Tent

When the Employee Ownership field comes together, several questions around the logistics of forming a big tent always come up: What models are we supporting? Is there an agreed-upon “we” in the first place? 

There are several EO models vying for attention: the two primary ones being Employee Stock Ownership Plans (ESOPs) and Worker Cooperatives, as both have been around for decades (or centuries, in the case of cooperatives). There is sometimes tension among respective proponents around how much their goals overlap, with ESOPs primarily serving as a wealth building tool for workers and Worker Cooperatives being touted as a way to build power and pathways to employment among disenfranchised workers. But to complicate things further, there are several new entrants to the Employee Ownership space:

  • Employee Ownership Trusts (EOTs), a flexible model that allows for different forms of wealth sharing and worker decision-making; 
  • Models which provide a small broad-based ownership share to workers in traditional PE deals, such as that employed by Ownership Works for Private Equity firms; 
  • A variety of new, partial EO forms that are designed to increase ownership share over time or exit to employees (e.g. Social Capital Partners and HB Capital, Good Scout Capital, Teamshares). 

The Kelso Workshop has historically centered around ESOPs, but over the past decade has increasingly incorporated Worker Cooperatives, and now some of these new forms, into its programming.

At the Workshop, it was clear that the entry of new models and new voices makes it more difficult to develop shared strategies, especially around policy. As it stands, Employee Ownership is actually supported by both Republican and Democrats, as exemplified by the proposed Employee Equity Investment Act, a bill to support EO investment that has backers on both sides of the aisle. I noticed multiple occasions where the inclusion of Worker Cooperatives in national EO policy discussions was cited as a concern, where EO would seem “too radical” to continue to gather support from moderates and conservatives (for context, Worker Cooperatives have a history of embeddedness within labor movements and movements to develop non-capitalist economies, as with the Solidarity Economy). 

I appreciate the concern lifted here, but believe it is not a real issue. Impact investors, and according to others more familiar, policymakers, are much more interested in the proven effects for workers of each model rather than political differences among practitioners. They see different approaches relevant for different economic contexts, scales, industries, and worker profiles. As a result, multiple models get support rather than having policymakers or investors pick winners and losers. 

Furthermore, jettisoning other EO models in favor of ESOPs at the national stage would cause the EO movement to miss out on the extremely important tie between coops and grassroots-led movements. The labor and Solidarity Economy connections strengthen the actual impact of the businesses by embedding them in broader supply chains, nonprofit support for workers, and initiatives at the community level. If anything, we need to make sure that this end of the EO spectrum is properly represented at national tables for the advancement of EO, and that new policy and field building initiatives benefit them and not just models focused on worker wealth. I commend Rutgers for increasingly working these aspects into the programming over the years. 

Something that didn’t come up much at the Workshop is the flip side of the concern over “radical” cooperatives: the renewed interest of private equity in Employee Ownership. If some advocates for bipartisanship are concerned that Worker Cooperatives risk branding EO as a leftist concept, there should be a parallel concern that weaker EO forms at large scale risk branding EO as merely an alpha-generating opportunity for investors. Some of these new forms provide only small percentages of ownership to workers, generating more value for investors than for workers and therefore increasing the wealth gap. Others only provide a financial upside – important as that is – and forgo the important benefits of develop ownership culture and workplace democracy. We welcome the entry of new capital actors into the space, but advocate for deep impact guardrails, as discussed in our recent SSIR piece

Why Aren’t We Seeing More Employee Owned Firms? 

Another theme that came up at the Workshop was an acknowledgement that despite all of the new financing strategies, some policy gains, awareness building, and excellent research, the number of employee owned firms has flatlined, or even decreased. This has been a longstanding theme for EO practitioners, including at the Workshop. 

Several hundred ESOPs are created per year, but more are dying. Tej Gonza, researcher at the University of Ljubljana, suggested that the disappearing ESOPs may not accurately represent the health of ESOPs, as many that disappear are in fact merged with other ESOPs. Importantly, Gonza hypothesized in his presentation that this is because of fiduciary duty for ESOPs to sell to outside investors, the financial difficulties companies face due to repurchase obligations, and occasional incentives for managers with additional stock option plans to sell for their own benefit. On the Worker Cooperative side of EO, the number of coops is still growing, as demonstrated by the presentation of DAWI’s yet-unpublished update to their State of the Sector Report by Mo Manklang and Olga Prushinskaya, but not at a very fast rate. 

These numbers serve as a reminder that we are swimming upstream in the whitewater rapids of shareholder primacy. Underlying the decrease in the number of ESOPs, where the majority of programs are ended upon the sale of the company (as opposed to the company shuttering), is the private equity’s enclosure of massive swaths of the economy. When an ESOP sells to a PE firm, the plan typically ends, meaning that future workers don’t get to participate in the same benefits. PE acquisitions also limit the creation of ESOPs in the first place by providing tempting alternatives for selling owners, offering immediate cash at a good valuation as opposed to the slower exit process for many EO conversion deals. The EO field can seem like a cottage industry compared to the robust set of deal brokers, investment banks, industry networks, and host of tools for investors of the traditional M&A market – especially at the more impact-centric end of the spectrum 

Yet, despite the recent numbers and the stacked odds, there was a collective sense among Workshop participants that we are at a positive inflection point. I tend to agree. The new attention that Employee Ownership is garnering within policy and finance is an indication of the broad applicability of these models. The breadth of new models being explored within the past few years demonstrates the growing acumen among the financial innovators, legal experts, and business community within the field, as well as the recognition by mission-driven investors of the impact potential of ownership. As someone who spends a considerable amount of time making the case for shared ownership as a worthwhile strategy for impact – and in fact a necessary one to avoid repeating mistakes that led to the mess we’re in – I believe we must learn from the stagnant growth, rather than let it serve as self-fulfilling evidence that it cannot grow at all. For that reason, I greatly appreciated the critical analysis of Kendeda’s Big Bet on Employee Ownership, presented by Michael Palmieri of the Ohio Center for Employee Ownership with a response by Steve Dubb of Nonprofit Quarterly. 

The Need for Capital Conversations

One theme that felt under addressed at the Workshop was capital and finance. The session I participated in, Financing Shared Ownership of Enterprise: Models, Mapping, Metrics, did cover a range of topics relevant to finance: Transform Finance’s research priorities that make an impact case to investors, a summary of the impact data collection experience for Apis & Heritage’s Legacy Fund by Jamie Pockrandt at DAWI, and a proposal for worker-centric (rather than investor-centric) measurement by Sean Geobey of University of Waterloo. But given the number of times financing was named as a barrier to growth of the field, and seen as lurking behind several issues in the field, I left wanting more discussion on what the research community can do to address the needs that AOEs have in accessing right-sized finance.

This left me convinced that what Transform Finance is working on – addressing the mismatch between investors’ existing tools and the pipeline of emerging AOE deals and funds that support them – is indeed a missing area in the broader field. We don’t just need to educate hesitant investors on the impact of AOEs, we need to organize new investors (and even new types of investors) into the space altogether. Furthermore, we must develop new financial products and vehicles that change the fundamental calculus used by those new investors. As the field collectively tackles the questions surfaced at the Kelso Workshop, we must think not just of impact investors, but also conventional investors, lenders, and other non-impact partners, as prompted by Delilah Rothenberg at the Predistribution Initiative.

Overall, the Workshop was, as usual, a well-organized place to learn about and celebrate the advances of Employee Ownership – and also to reflect on where we could do better. It won’t be easy, but the people gathered in front of the plenary stage represent the seed sowers of a viable alternative to our outdated economic system. I encourage participants on all sides of this space to embrace finding the common ground that, when cultivated, will lead to the collective growth of Employee Ownership and Alternative Ownership Enterprises more broadly. 

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