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Employee Ownership as a Strategy for Building Wealth for Working Families

and Communities

Prepared for the Campaign for America’s Future Conference, Washington, DC, June 19, 2007

John Logue Ohio Employee Ownership Center

Employee Owners pose at Falcon Industries

Employee-owned Kraft Fluid host visitors

2Ohio Employee Ownership Center

Ohio Employee Ownership Center

• Mission: Broaden ownership of productive assets among Ohio workers and deepen that ownership through employee participation in decision making

• Impact: Since 1987 the OEOC has worked with 535 employee groups and retiring owners to explore whether employee ownership made sense for them; of these 79 firms have become partly or completely employee-owned, creating 14,500 new employee owners. Through 2003, 49 of these firms had created $349 million in equity for their employee owners.

• Contact information113 McGilvrey Hall telephone: 330-672-3028Kent State University fax: 330-672-4063Kent, Ohio 44240 email: jlogue@kent.eduhttp://www.kent.edu/oeoc

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I. Employee Ownership and Asset Creation

There are a number of forms of employee ownership in the United States…

4Ohio Employee Ownership Center

Forms of employee ownership1. Employee Stock Ownership Plans (ESOPs)• Tax advantaged retirement plans for employees• Invest primarily or exclusively in the stock of the

employing company• Can borrow moneyConsequently ESOPs are an excellent tool for employees

to buy companiesMay own anywhere from a tiny minority share to 100% of the

companyESOPs are highly regulated “qualified employee pension

plans”

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Forms of employee ownership (continued)

2. Broadly distributed stock options• Public companies: contingent compensation for

employees rather than long term ownership• Closely held companies: Must be coupled with

internal market3. Employer stock in 401(k) plans• Many companies match employee 401(k)

contributions in company stock• Some public companies provide purchase of company

stock as a 401(k) investment option

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Forms of employee ownership (continued)

4. Direct employee stock ownership (stock purchase plans)• No tax advantages• Sense of direct ownership

5. Cooperatives • Fewer tax advantages• Fairly flexible – especially under Ohio law• Most advantageous in smaller companies• “Born democratic” – members control the co-op

7Ohio Employee Ownership Center

The employee-owned sector in the US todayType of ownership Companies Employee-

ownersEmployee Equity

ESOPs 9,225 10.1 million $600 billion

Broad-based

stock options

4,000 9 million “several hundred billion”

401(k) Savings plans holding company stock

2,200 plans 4 million $75 billion

Stock purchase plans 4,000 12 million no estimate on value

Cooperatives Several hundred worker

cooperatives

perhaps 10,000 employees

no estimate on value

Source: National Center for Employee Ownership, 2006

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II. Landscape of Employee Ownership

Brainard Rivet employees rally to buy plant, Girard, OH, 1997. Photo: Emil David

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A profile of ESOP companies

In Ohio there are about 400 partially or wholly employee-owned companies with about 400,000 employee owners

• Median sales: $15 million• Median employment: 110-120 employees• Closely held: 85% of companies• Closely held: 17% of employees• Majority employee owned: ca. 35%• Full corporate governance rights for employees: 42%• Non-managerial employees on board of directors: 17%• Automatic disclosure of financial information: 48%• If no automatic disclosure (i.e., other 52%),

financials are available on request: 57%

Source: Logue & Yates, Real World of Employee Ownership (Cornell UP,2001)

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Reasons for employee ownership (multiple reasons possible)

• ownership succession 58%• divestiture of plants & divisions 11%• averting shutdown or major job loss 5%• blocking a takeover or purchase by another company 6%• financing expansion of company 10%• reducing borrowing costs 15%• replacement of another benefit plan 10%• additional benefit plan 35%• philosophical commitment to employee ownership 44%

Source: Ohio study data, Logue & Yates, Real World of Employee Ownership, Appendix

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Example: Fastener Industries

Below: Fastener employees who bought the company in 1980 and who were still working there at the 2005 party for 25th anniversary of the ESOP & 100th anniversary of company – Berea, Ohio

Manufactures fasteners – nuts, bolts, weld fasteners, levelers

Third generation family owners sold to employees in 1980

Specialized in short run, hard to make fasteners

Manual workers retiring with accounts in $4-500,000 range

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Example: Casa Nueva

Employee cooperative members, Casa Nueva, Athens, Ohio

• set up by 8 unemployed restaurant workers in 1985 after their previous employer went bankrupt

•has created a market for higher value-added products for area farmers

• spun off a bakery co-op

• incubator for entrepreneurship

Employee-owned restaurant cooperative

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Example: Producers ServicesProducers Services, Zanesville, Ohio

Oil field service firm

1994: at bottom of drilling cycle, assets sold to Chinese – employees protest and buy 73% of company

1998: employees bought remainder

2003: company ranks 4th in Ohio in assets per employee owner: an average of $259,000

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As an asset creation strategy…

• All forms of employee ownership link income from work and asset creation.

• The linkage between income and assets makes the assets more sustainable. Employee ownership of companies also makes the income more sustainable.

• Most forms of employee ownership create long-term assets that grow through productive investment

• Some forms – democratic ESOPs and co-ops – also create greater employee control over their working lives.

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III. Impacts of employee ownershipEmployee ownership improves company

performance

Difference in Post‑ESOP to Pre‑ESOP Performance (2000)

Annual sales growth

+2.4%Annual employment growth +2.3%

Source: Douglas Kruse and Joseph Blasi, Rutgers University

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Why?

-6

-4

-2

0

2

4

6

8

Participatory EO Non Participatory EO

Relative Growth

Employee ownership + employee participation makes the difference

Sales growth of participatory employee-owned firms rose 7.2% faster than that of their competitors. Sales growth of non-participatory employee-owned firms lagged that of their competitors by 4.3%. Baseline (0.0%) equals sales growth of competitors.

Source: Jim Keogh and Peter Kardas, Washington State study

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Employee Participation in Ohio ESOP firms and Change in Profits Relative to Industry

3

24 2330

48

0

10

20

30

40

50

60

No change(N=29)

Added 1(N=42)

Added 2(N=31)

Added 3(N=20)

Added 4 or 5(N=25)

Better than Industry

(per

cen

t of

fir

ms)

Source: Logue & Yates, 2001

Percent of Ohio ESOP firms more profitable than industry by increased opportunity for employee participation

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Impact on job creation

0 10 20 30 40 50 60

Worse than Industry - 1%

Same as Industry - 48%

Better than Industry - 51%

How Ohio ESOPs Compared with Their Industriesin Job Creation and Retention during the 1990-92 Downturn

Source: Logue & Yates, Real World of Employee Ownership, 2001

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Impact on total employee compensation1999 comparison of wages and benefits in matched ESOP and non-ESOP companies

ESOP non-ESOP

Average wage: $19.09 $17.00

Median wage: $14.72 $13.58

Average retirement assets

ESOP $24,260 0

other plans 7,953 $12,735

Total retirement assets $32,213 $12,735

Source: Peter Kardas, Adria Scharf, and Jim Keogh, 1999 Washington State study

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Impact on creation of wealth

Ohio wealth creation through ESOPs

1993 2001

Average equity per employee owner $24,500 $68,000

without 3 top outliers $19,060 $40,000

Source: IRS Form 5500 filings, Larkspur Data Resources, for the years in question

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ESOP Impact on Employee Influence in Ohio - 1

Percent using technique

before ESOP

Percent using technique

after the ESOP

Suggestion system 53% 67%

Problem solving teams 25% 52%

Self-managing work groups 14% 26%

Non-managerial employees on Board of Directors

0 17%

Source: Logue & Yates, Real World of Employee Ownership, 2001

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ESOP Impact on Employee Influence in Ohio - 2

20 1823

4439

36

0

10

20

30

40

50

Profits Better Positive QuantitativeImpact

Positive QualitativeImpact

No NM on Board NM on Board

(per

cen

t of

fi

rms)

Nonmanagerial (NM) Directors and Firm Performance

Source: Logue & Yates, 2001

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IV. Employee ownership and community economics

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Employee Ownership & the community

• Anchors capital in the community

• Secures jobs with better wages and benefits

• Increases the rate of reinvestment

• Stabilizes/grows the tax base

• Increases home ownership

• Builds wealth for working families

• Increases employee influence on job

• Some evidence that it also contributes to greater civic participation, personal satisfaction with life, and better health

Employee discussion at PT Tech

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Comparison of employee-owned firms to their industries

Worse than industry

Better than industry

Change in employment – last 3 years 9% 37%

Outsourcing jobs 0% 49%

Rate of capital investment 17% 31%

Non-managerial wages 7% 28%

Benefits 2% 49%

Change in profitability 15% 29%

Source: Ohio ESOP survey, 2003-06

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• We can encourage employee ownership in business ownership succession throughout the country

• We can create state & local employee ownership programs

• We can integrate employee owner- ship in the overall state & local economic development strategies

• We can create new financing sources

• Large institutions (hospitals, universities), which are contracting out already, can contract with new employee service co-ops (food services, laundry, janitorial services)

Can we do more? Select Machine employees pose with sellers after signing transaction papers,

Brimfield, Ohio, Oct 1, 2005

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National:• The ESOP Association www.esopassociation.org

• National Center for Employee Ownership www.nceo.org

• The National Cooperative Business Association www.ncba.coop

• National Cooperative Bank www.ncb.coop

State:• Massachusetts Employee Ownership Office www.masseio.org

• Northcountry Cooperative Development Fund http://ncdf.coop

• Vermont Employee Ownership Center www.veoc.org

• Ohio Employee Ownership Center www.kent.edu/oeoc

For more information on ESOPs and Co-ops