Scaling up employee ownership is key to an equitable economic recovery

Phoenix Coffee, a Cleveland-based coffee roaster with 37 employees and several coffee shops, was entering October weathering the same struggle as myriad other small retail businesses. Forced to close its storefronts and subsist on a fraction of its normal business during the COVID-19 pandemic, times were tough.

It would not normally be an auspicious moment for the company to gain the interest of an investment firm. But that month, Phoenix Coffee announced it had received an equity investment from the nonprofit Fund for Employee Ownership that would enable the business to stay alive and convert to a worker cooperative.

Launched by Cleveland’s Evergreen Cooperatives in 2019, the Fund for Employee Ownership is not your typical investment fund. It is a mission-driven enterprise that acquires companies, helps them become more profitable through building an ownership culture, and relaunches them as worker-owned cooperatives. Its investment has helped Phoenix Coffee maintain its workforce and pivot from its cafes to a robust delivery service.

“Banks were skeptical about loaning to hospitality companies like restaurants or coffee shops—and that was before COVID-19,” explained former partner Christopher Feran. “This new partnership with Evergreen positions us to not just survive the pandemic but to also grow and share profits with our employees, who are now also owners.”

Employee ownership can take multiple forms. In the U.S., most people are familiar with profit-sharing plans, where upper-level managers receive some of their compensation in the form of company stock. Broad-based employee ownership takes two forms: Employee stock ownership plans, or ESOPs, distribute shares to employees through a trust. The employees are the beneficiary of the trust, and generally receive the value of their shares when they retire. Examples of ESOPs include Publix supermarkets, King Arthur Baking Company, and Recology, the largest waste hauling and recycling firm on the West Coast.

Worker cooperatives, on the other hand, are businesses that are owned and governed directly by employees, using the one share, one vote principle. Worker cooperatives tend to be smaller and more democratic than ESOPs, but there are large worker cooperatives that use traditional management structures—for example, Cooperative Home Care Associates, a home care agency in the Bronx that employs more than 2,000 women of color, about half of whom are worker-owners.

Could financing that helps businesses like Phoenix Coffee transition to employee-ownership be key to saving numerous small enterprises and the jobs they create from a pandemic-induced demise? The data suggests yes.

A recent survey by the Employee Ownership Foundation and the Rutgers Institute for the Study of Employee Ownership and Profit Sharing shows that employee-owned firms during the current economic crisis have laid off fewer employees than comparable conventionally owned firms. Employee-owned firms were also less likely to reduce employees’ pay and hours and more likely to provide personal protective gear. Employee-owned firms that did not receive emergency government loans were actually three times more likely to retain employees than conventional firms receiving federal assistance.

These findings align with previous studies demonstrating that employee-owned firms are more resilient during recessions. Employee ownership is also a proven strategy to help reverse the growing wealth gap that is eroding our democracy. Employee ownership stock plans  hold $1.4 trillion in retirement assets for workers, with individual worker accounts worth on average $130,000. At a time when 4 in 10 Americans don’t have $400 on hand for an emergency, long-term workers at ESOP firms can retire as millionaires.

Despite these benefits, the number of employee-owned U.S. firms has not grown for decades. What’s needed to scale up conversions, we argue in our new report, Opportunity Knocking, is risk capital, similar to the kind that the Fund for Employee Ownership provided to Phoenix Coffee. Our research found about a dozen such investment funds in existence or being launched to finance employee ownership conversions, many offering investors midrange annual returns of 12 percent to 15 percent. These funds are financed by a growing group of impact investors (whose assets under management reached $715 billion in 2019) committed to using investments to drive social change. Such impact investing in employee ownership could become the lever to redirect wealth into the hands of working Americans, creating a more equitable economy that is more resilient against future shocks.

But to bring significant private capital to the table, governments—using lending and risk-reduction tools—must help build a robust employee ownership investment ecosystem. This could involve creating new funding vehicles, like the $500 million U.S. Employee Ownership Bank proposed in a 2019 bill by Vermont Senator Bernie Sanders, or repurposing existing ones. The federal government directly operates dozens of revolving loan funds, banks, and investment vehicles, and state-level development finance institutions directly invest in numerous economic activities.

One of the most expansive policy ideas comes from investment banker Dick May of American Working Capital, who has drafted a model policy for $100 billion in federal loan guarantees for employee ownership finance. May estimates this could create 13 million new employee-owners in a decade, add 1 million new jobs, and generate more than $1.7 trillion in new wealth for workers. Such guarantees could attract private equity at scale.

This would be akin to the federal government’s decision after World War II to back mortgages to create widespread middle-class homeownership. With appropriate guardrails to prevent overextraction of wealth, a new federal commitment to widespread enterprise ownership could bring economic security to millions historically left behind, particularly people of color.

In 2018, Congress passed the Main Street Employee Ownership Act, which encourages Small Business Administration loans for employee ownership. But few loans have been directed to these transactions because SBA personnel, lenders, municipal leaders, and business owners are unfamiliar with employee ownership.

This is where the Biden administration can step up. To bring employee ownership to scale, the administration could support two previously introduced bipartisan bills (S. 4236 and HR 2258) to increase lending to employee-owned firms.  It should also devote more resources to enable small-business agencies and advocates to do more education about employee ownership.

As we face the task of rebuilding decimated local economies and closing a gaping wealth gap that is dividing our nation, advancing employee ownership is essential to building a democratic economy that offers economic security for all.

Marjorie Kelly and Jessica Rose are cofounders of Fifty by Fifty, the employee ownership initiative at the Democracy Collaborative, and authors of Opportunity Knocking: Impact Capital as the Transformative Agent to Take Employee Ownership to Scale.

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