People putting parts together to build a rocket ship (Illustration by iStock/ Rudzhan Nagiev)

Business as usual is failing the planet and all of us.

Our economy is not creating a livable society for most people. It is fueling climate change, worsening wealth inequality, seeding the conditions for emerging threats to democracy, and disempowering working-class communities and communities of color.

Those focused on solving these issues are increasingly turning to the way capitalism itself is structured. Many argue compellingly for changing our economic system completely, while others lobby for reform from within. Regardless of one’s perspective on system change, there is an important underlying economic feature that is often overlooked: the structure and ownership of the enterprise. Who owns an enterprise, and what rights are associated with that ownership, determines a large part of who controls and benefits from the economy.

Conventional enterprises typically have a single class of ownership, delineated by shares. That share ownership comes with two core bundles of rights for shareholders: economic rights, which provide monetary value, and governance rights, which grant control over the enterprise. Our legal system is designed to protect the interests of these shareholders—typically outside investors distant from the company itself—above other stakeholders in the company, including its workers, the communities it affects, and the planet. Because investors control the enterprise and want to increase the value of their investment, they seek increasingly extractive avenues to amass capital, often at the expense of other stakeholders. This is often called shareholder primacy.

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Shareholder primacy may seem like common sense. Investors risk their own capital, so why shouldn’t they be rewarded? But share ownership is concentrated in the hands of few individuals and investment institutions, contributing to inequality of wealth and power. As a result, workers and other stakeholders can’t easily improve their conditions or participate in the wealth built by the enterprises they are helping succeed. Meanwhile, even mission-oriented enterprises struggle to achieve net positive impacts since the logic of shareholder primacy always encourages them to maximize profit at the expense of everything and everyone else.

We need models that limit the profit-maximizing drive of outside investors and allow other stakeholders the opportunity to influence and financially benefit from the companies that affect their lives. Fortunately, there is a rich body of work which does just that: alternative ownership enterprises.

An Economy That Works for Everyone

Alternative ownership enterprises (AOEs) are firms that significantly shift economic value and decision-making power toward the non-investor stakeholders they impact, such as workers, producers, consumers, community members, or even a nonfinancial purpose.

There are many different models of AOEs. Some are well established, while others are still nascent. They include:

  • Employee stock ownership plans (ESOPs) are trusts that hold all or part of a company’s stock on the behalf of its employees. ESOPs grant shares to employees over time, who can then sell those shares back to the firm upon leaving. ESOPs are the most numerous AOE model in the United States thanks to a highly favorable tax treatment, and they are well-known in the business community as a way to provide solid wealth-building opportunities to workers. The retailer Publix and the food company King Arthur Baking Company are both owned by ESOPs.
  • Steward ownership models are designed to protect the mission of a company. Examples include perpetual purpose trusts (PPTs) (a trust holds all voting shares in a company to continue its mission in perpetuity), foundation ownership (a charitable foundation owns the shares of a company), and golden shares (a third party holds a special share to vote on major decisions that may affect the company’s mission). Steward ownership models are highly flexible and are typically applied in contexts where a company has a strong mission (e.g., providing renewable energy or healthy food). The clothing manufacturer and retailer Patagonia is now controlled by a PPT, while Newman’s Own is foundation-owned.
  • Hybrids and model variations take these base models and adapt them to different goals. Variations include but are not limited to: ESOPeratives, which combine ESOP ownership with cooperative governance; employee ownership trusts (EOTs), which use the PPT model to make employee well-being the company’s purpose; and cooperative holding companies, which acquire several companies that are cooperatively owned and governed by an umbrella organization. For example, the open-source software development company CodeWeavers recently set up an EOT, while Evergreen Cooperatives is a cooperative holding company in Cleveland.

The variety and flexibility of models allows any business owner, stakeholder, or investor to find one that best matches their needs, from building wealth to protecting a company’s purpose.

The Impact of Alternative Ownership Enterprises

The Case for Employee Ownership, a report by Project Equity, compiles existing studies on worker cooperatives and ESOPs along various impact outcomes, including impacts on business performance, workers, and communities. The results are inspiring: positive effects on financial performance, resilience to economic shocks, lower turnover rates, higher wages and wealth building for workers, better measures of job quality, and, importantly, clearly demonstrated ways of reducing gender and racial inequality. Additionally, the research suggests that employee ownership increases the civic participation of workers, strengthening democratic practices outside the firm, and supports general well-being in areas with higher rates of worker cooperative employment.

Most of the data evaluating the impact of AOEs has focused on those two main models of employee ownership—worker cooperatives and ESOPs—because most of the other models and variations are new and still gathering a base of experience. But we expect the positive impacts to also be present to some degree in other models. A report by Oxfam shows that farmer cooperatives, where an entity is owned by small farmers, are better at distributing wealth across supply chains. Studies have shown that foundation ownership, a steward ownership model popular in Northern Europe, results in many positive effects for workers, firm performance, and their social objectives.

AOEs, importantly, are better vehicles for achieving an impact goal than conventional companies. The different steward ownership forms are designed to allow nonfinancial goals to be the baseline for decision-making, meaning that profit cannot trump purpose. This is a major protection against mission drift, a common situation where the drive toward profit pushes an otherwise impactful company to let its purpose slide. Research has shown that even outside of the context of steward ownership, distributing ownership to non-investor stakeholders can also help prevent mission drift.

An economy based on alternative ownership enterprises would anchor a new system of finance and business. The primary goal of businesses would be to fairly distribute value and create sustainable, impactful jobs, rather than chasing returns for investors. The economy would become less consolidated as fewer businesses seek to sell their companies to others, curbing monopoly power and pressure on small- and medium-sized enterprises. Overall, companies would be focused on creating value—broadly defined beyond just monetary value—for all of their stakeholders, not just their shareholders.

The Time for Change Is Now

We are experiencing a major phenomenon known as the “silver tsunami,” where over $10 trillion in assets are expected to change hands as baby boomers retire and look for succession plans for their businesses. The most common options for these owners are shutting down or selling to another business or a private equity firm. Instead, converting these businesses to AOEs creates a twofold impact: creating new, long-lasting stakeholder ownership and avoiding the harm to workers and communities of a sale to extractive investors. The “silver tsunami” creates a once-in-a-generation opportunity to support business conversions.

At the same time, we are seeing an increase in activity in the space from more conventional and surprising players. Private equity has begun to explore some forms of employee ownership, particularly through the Ownership Works initiative, which encourages private equity firms to allocate a small portion of shares to workers and generate meaningful wealth for them when the company is sold. Patagonia’s Yvon Chouinard forfeited his billionaire status by donating his shares to a PPT and a sister nonprofit, which has catapulted conversations around alternative succession plans. As of this writing, Michael Bloomberg is exploring a similar option for his company. Meanwhile, employee ownership models are gaining traction in the policy arena, with bipartisan support for the proposed Employee Equity Investment Act, which would provide financing for AOE conversion funds.

Mission-Oriented Capital to Catalyze Change

Transform Finance, the organization we work for, is leading research in this field. Over the past 12 months we have conducted interviews with over 60 asset allocators, fund managers, field builders, entrepreneurs, and other practitioners. We have found that despite the transformational potential of AOEs, the existing financing infrastructure is too thin to provide the capital needed to make the most of this moment. The new generation of funds for AOEs that have emerged in the past 5 years—innovative cooperative vehicles like the Obran Cooperative holding company, funds for emerging models like Common Trust’s funding platform for PPTs, and ESOP funds focused on impact-first transactions like Apis & Heritage’s Legacy Fund—have had to overcome major hurdles to raise capital, even from mission-oriented investors.

The infrastructure needed is not just for impact-first capital; there is space for a range of risk, return, and impact expectations. This is a strength of the field, as it means that a variety of financial players can enter. But it is also a risk that larger, more powerful actors will draw more attention to high-return investments that may be less transformative. For example, ESOP transactions have been used by private equity funds to maximize profits, over-leveraging portfolio companies with debt and providing only a small percentage of shares to workers.

Since most models are flexible in how much they share economic and governance rights with stakeholders, and impact varies with circumstances, it is critical to make distinctions between more and less impactful investments. Otherwise, the transformative potential of AOEs may be lost, and mission-oriented investors will leave impact on the table.

Impact Recommendations

Transform Finance has developed recommendations to serve as guidelines for moving capital toward the most transformative alternative ownership enterprises. They are relevant whether an investor is making deals directly with a startup enterprise, helping a company convert to an AOE, or investing in an AOE fund.

  • Shift a meaningful percentage of economic and governance rights. For economic rights, we recommend following the general principle of non-extractive financing, which is defined by Seed Commons as “the returns to the [investor] not ever exceeding the wealth created by the [investee] using the capital.” For governance rights, stronger arrangements will allow the core stakeholders (e.g., workers, community members, and suppliers) to participate in major corporate decisions (e.g., the decision to sell the company) and have input on day-to-day management.
  • Shift governance rights, not just economic rights. While wealth is important, workers and other stakeholders should have a fundamental right to decide how their companies work for them. Putting non-investor stakeholders at the helm of the business shifts the overall power in the economy to working people and those who are excluded from the halls of power.
  • Prioritize models that protect the company’s mission. Some models, such as steward ownership models, bake mission preservation into the company structure, often only allowing the sale of the company to another steward-owned company. It is also possible to add layers of mission protection to existing models, such as worker cooperatives that mandate proceeds go to charity if the company is ever sold. These models ensure that no outside party can jeopardize the company’s mission.
  • Commit to serving movements, workers, and communities of color. Those most marginalized by the current system best understand how to change it and therefore must be central to this conversation. AOE strategies must ensure that underrepresented groups are prioritized when looking at which sectors to invest in, which businesses to convert, and how economic and governance rights are distributed. It also means investing in businesses, funds, and other AOE projects that are connected to labor movements, solidarity economy organizers, and other movements for racial and economic justice.
  • Prioritize enterprises that consider the entire range of relevant stakeholders. A major difference between AOE and employee ownership is that the former opens the aperture to other stakeholders that contribute to a business. Why not involve customers (as with multi-stakeholder cooperatives) or supply chain stakeholders (as in the PPT-owned Organically Grown Company)? A holistic and fair allocation of rights, while difficult to balance, means that each important stakeholder is rewarded for their participation in the business and can be more deeply committed to its success.
  • Invest in AOEs that take a movement-building approach. We will not achieve systemic change without a well-coordinated alliance of investors, businesses, field builders, and networks. This idea is rooted in a thesis that solidarity economy practitioners use in developing worker cooperatives as a political struggle: Connecting cooperatives to each other, integrating cooperative supply chains, and forging connections to grassroots movements will form a political block that can better advocate for the movement’s needs. It may be difficult to do, but it is worth the additional effort as this kind of movement building leads to impact at scale.

As of today, few enterprises can achieve all these goals at once, but most investments can incorporate at least one dimension listed above. Investors should focus on deals and funds that are strong in multiple of these areas and avoid those that are not fundamentally challenging conventional norms. Furthermore, investors can leverage their voice as dealmakers and limited partners to increase the impact of their portfolio companies and funds by demanding more impactful terms and structures.

Shifting Who Controls and Benefits From the Economy

Now is the time for mission-oriented investors to be bold. AOEs may not be the flashiest form of impact, but they represent the greatest potential for a massive and much-needed shift in the economy.

With an influx of capital from asset allocators, new funds will build on their track records, impact data and deal structuring experience will support fund growth, and positive signals will be sent to more areas of the finance world to encourage them to add AOEs to their impact strategies. Newly capitalized enterprises will create opportunities to build wealth and power for ordinary people and to reprioritize the purpose of business to support a more just, equitable, and healthy world.

Of course, while investors must play a critical role in transforming our economy, other actors will also play a key role in change: grassroots movements representing workers and communities of color, including labor movements; philanthropic actors who provide critical resources for field building; and policy makers who can create enabling environments. Investors should partner with these groups by asking civil society how their frameworks and ideas can inform an investment portfolio, working with philanthropy to pair investment capital with infrastructure support, and advocating for favorable regulations and public investment into AOEs.

The road to a new economy is not going to be easy, but it’s a necessary road to take. Sharing the rights to economic value and shifting the power to make economic decisions will start a positive ripple effect that may just be the solution we need.

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Read more stories by Andrea Armeni, Curt Lyon & Julie Menter.