Who Owns This Business?


A Small Insertion into a Recent Defense Bill Could Yield Important Results.

The midweek post on this blog most often addresses questions of science and technology. This week we are taking a slight detour to examine questions around ownership of companies in the modern economy.  In an era in which income inequality is an increasingly front and center issue, the idea of employee ownership has appeal.

This is not to claim that employee ownership is always a winning formula. A successful company still needs management. A business run like a New England town meeting is unlikely to survive in a tough competitive environment for long. But the idea of those who do the work also own the business has a lot to offer. For one thing, employee ownership could reduce employee turnover at least a bit. Many small businesses suffer from high turnover (and so to do their clients). In a full employment economy, this would be a welcome trend.

One would also hope that such a company would reflect the values of its employees, especially through enlightened employee policies and support of workers’ rights in other companies. This should be more likely but is not a sure thing. Publix, for example, has been called out in recent months for financial support to political candidates that are no friend of the working person, and for refusing to support a fair labor movement among tomato harvesters.

So, not a perfect solution to the world’s ills, but having more companies that have employee owners is worth trying on a larger scale. If the only outcome is that management and employees have a better understanding of each other’s roles and responsibilities, it’s a good thing.

The new legislation that has just passed as a part of a defense authorization bill was based on conceptual work done by NY Rep. Kristen Gillibrand and sponsored as legislation by NY Rep. Nydia Velazquez as the Main Street Employee Ownership Act. Rutgers University provided substantial research support. The legislation had a fair amount of bipartisan support. It had passed the House. Prospects were a bit dimmer in the Senate until it was incorporated into the Defense bill, at which time it passed.

This is an interesting cross-generational phenomenon. Some of you may be surprised to learn that we are facing a small business closure crisis as a result of Baby Boomer retirements. This generation owns about half of the nation’s privately held businesses. That comes to over 2 million businesses, employing 1 in 6 workers.

Half of these business owners intend to retire in the next 10 years, according to Rutgers, yet only about 15% have a transition plan in place. Some few of these will be passed down within families, but many will be bought by larger corporations or will shut down. I see examples of the latter almost weekly. The owners are ready for a break, no one steps up to buy the business (often due to a lack of financing) and jobs are lost.

This new legislation offers some helpful options. It enables the Small Business Administration (SBC) to offer loans supporting employee stock ownership plans, (ESOPs), making it possible for employees to buy a business. The company can use ESOP funds to set up a trust into which shares go that can be distributed to employees equally or on a formula of relative salaries or time with the company.

At this point, the impact will be fairly small. Loans are limited to $5 million but may be combined with other resources to cover somewhat larger companies. Still, it’s an important step and a rare example of some quite bipartisan work. This is worth watching and if it proves out, expanding for more coverage.

Done well, such an approach does a world of good. It enables a retiring generation to pass on their legacy in a meaningful way. It empowers a new generation to become business leaders as well as labor leaders. It provides continuity for businesses and at least the potential of improved results for clients. It keeps the roots of businesses grounded in local communities. And it might enable better communication between labor and management in some places.

As union membership has declined, so too have the quality of life for workers. Increased employee ownership may be one resource to reverse that trend.

Not bad for one little piece of legislation. If you would like to read more about the studies that lead to this legislation and about ESOPs more generally, take a look at https://smlr.rutgers.edu/sites/default/files/documents/ResearchDocs/3-21-18_main_street_employee_ownership_act_summary_5_copy.pdf

     Bill Clontz

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