It’s Time to Put Employee Ownership on the Inclusiveness Agenda

An icebreaker scene from an all-staff conference in 2016, the year DAI launched the new global employee ownership program.

We are told that we live in an age of tribalism, when political and cultural allegiances shape our view of the world. But there is at least one thing that Democrats, Republicans, and Independents all agree on: they would all rather work in an employee-owned firm than some other kind of enterprise. “Americans disagree about a lot of things, but this is not one of them,” said Professor Joseph Blasi, Director of the Rutgers Institute for the Study of Employee Ownership and Profit Sharing. “Democrat or Republican, female or male, black or white, union or non-union, a majority of respondents said they prefer to work for a company with employee share ownership.”

Once you know the facts, however, it’s not surprising. Whether you’re talking about profit-sharing schemes, employee stock ownership plans (ESOPs), or employee stock purchase plans (ESPPs), employee ownership is close to an unalloyed good and the only surprise is that we haven’t made more of a push to promote it. For any policy maker seeking to address growing inequality, racial wealth disparities, simmering discontent with free markets, or the looming retirement challenge, expanding employee ownership should be a priority.

What’s So Great About Employee Ownership?

The bipartisan preference for employee ownership is easy to understand. “Studies measuring the benefits of various types of broad-based sharing programs find that workers’ wages are significantly higher when compared with those of workers in similar companies without sharing programs,” concludes the left-leaning Center for American Progress, which is calling for local, state, and federal action to revitalize the employee ownership agenda. And according to a 2017 study by the National Center for Employee Ownership (NCEO), employee owners’ household wealth is 92 percent higher than peers who don’t work for employee-owned firms, with more generous fringe benefits. They are more than four times as likely to have company-provided or company-subsidized childcare, and more than twice as likely to have paid parental leave. More than half of employee owners have a flexible work schedule, compared to just 34 percent of non-employee owners.

Employee ownership and profit sharing also tends to enhance firm survival and employment stability. And from the employer’s perspective, being more likely to ride out economic downturns is only one of the benefits: Research published in the Human Resource Management Journal in 2016, representing 56,984 firms, shows that employee-owned firms outperform non-employee-owned companies, and that ownership participation is correlated with profitability. A recent analysis of public companies shows that those offering employee stock purchase plans perform better than non-ESPP companies in terms of operating margin and return on equity. Other studies have found that employees with an ownership stake “have lower turnover and absenteeism, more company pride and loyalty and greater willingness to work hard, and make more suggestions to improve performance.”

Given the mutually reinforcing benefits to labor and capital, the last two Republican party platforms have explicitly supported employee ownership, the 2016 version endorsing “plans that enable workers to become capitalists, expand the realm of private property, and energize a free enterprise economy.” On the Democratic side, Jared Bernstein, chief economist to former Vice President Joe Biden and now a member of President Biden’s Council of Economic Advisers, has urged the creation of a government office to assist small businesses that want to set up ESOPs or other shared ownership plans.

No One Size Fits All

If there is consensus on the desirability of employee ownership, however, there is less agreement on what form it should take. That’s not necessarily a bad thing. Employee ownership comes in many shapes and sizes: the key is flexibility and room for innovation.

In the United States and Europe, for example, smaller firms often participate in worker cooperatives. Another popular US model of ownership, the ESOP, enables employees to build equity by accumulating company stock in a retirement trust. Large public companies also offer employees the opportunity to build equity through stock grants or ESPPs, where employees invest their own funds in company stock, sometimes at a discount. Then there are 401(k) plans that include company stock, and various combinations of stock options, phantom stock, stock appreciation rights, profit-sharing schemes, and so forth.

All told, the NCEO estimates that some 32 million Americans own employer stock through ESOPs, options, stock purchase plans, and 401(k) plans (though that number is now six years old, we have no reason to think it has diminished).

Does any single model stand out above others? ESOPs, for example, have much to recommend them, and in 2018 accounted for more than 14 million participants in the United States. But every company is different and faces different imperatives at different stages in its development. What progressive companies need is not a model: They need the flexibility to combine the best attributes of various models according to their own circumstances.

The DAI Experience

Our experience at DAI Global, where I am President and CEO, speaks both to the value of employee ownership and to the need for more latitude when it comes to achieving it in practice.

DAI is a global development company, implementing international development projects in something like 100 countries, everything from economic growth and good governance programs to health, environment, and stabilization efforts. In the United States, we work primarily for the US Agency for International Development.

DAI has always been employee-owned. In its early years, DAI was closely held by its founders, and as of 2006, by an ESOP that owned 100 percent of the firm. However, when we acquired a British firm in 2013, it became apparent that the 100 percent ESOP structure stood in the way, because the U.K. and other international employees were not ESOP-eligible. So we developed a model of broad-based, 100 percent employee ownership, retaining the ESOP as a legacy retirement benefit for US employees but permitting employees inside and outside the United States to directly purchase equity in the firm.

Launched in 2016, our hybrid Global Employee Ownership (GEO) model has features similar to stock grant and ESPP plans. Each new eligible employee investor receives a cash grant—currently $2,000—to establish a share account, and active employee owners are eligible for a “global performance bonus” calculated on a per share basis (meaning it’s the same for any shareholder). Share purchases are subsidized by the company.

The results have been encouraging. As we hoped, direct employee ownership is broad-based, with more than 80 percent of eligible employees now owning GEO shares. In 2016, the Global Equity Organization presented DAI with its award for Best Use of a Share Plan in a Private Company. In 2017, DAI’s model won the NCEO’s Innovations in Employee Ownership Award for its global inclusiveness.

Finally, financial performance has been exceptional over this period, reflecting—we believe—the increased engagement of our US and international staff, and enabling DAI’s share price to double.

Shared Prosperity and the Common Good

The point is not that we’re proud of this plan, though we are. The point is that we developed it to be uniquely tailored to DAI’s needs. But to make that happen, we had to get creative, work harder than we should have, and bring in a fleet of high-powered advisors. The two-year process cost us more than $1 million in consulting and legal fees alone. Such a high cost in terms of time and money—which has less to do with the expense of experts than the burdensome regulation they deal with—has likely proven a deterrent to employers who would otherwise pursue a more distributed ownership model.

With that in mind, what I’d urge of policy makers is a renewed commitment to employee ownership as an ideal and a real effort to make employee ownership less complicated.

No doubt this is easier said than done. Ever since the Enron debacle, regulators have been rightly alert to the dangers of luring unwitting employees into financial traps. And even ethically-sound, well-run companies can fail when their time has come.

But surely this legitimate concern calls for models that let employees diversify their assets, not limit their choices. In addition to their GEO plan, for instance, DAI employees have access to a separate 401(k) retirement scheme and diversified mutual funds. And as noted above, employee-owned companies actually have a good record when it comes to firm survival. DAI just celebrated 50 years in business.

Unfortunately, as the leading researchers on employee ownership recently documented, the tide seems to be going in the other direction: “the Federal Government has backed off its support for broad-based employee stock ownership and profit sharing during virtually every recent Presidential administration for almost four decades,” write Joseph Blasi, Douglas Kruse, and Richard Freeman.

This seems wrongheaded. Among the challenges facing the United States is growing inequality, especially a racial wealth gap, and it’s with this in mind that the Center for American Progress cites the benefits of company sharing programs for all participants. With the decline of pensions, personal savings and assets will be crucial to a livable retirement, and share ownership is a proven means of building retirement wealth. Gallup’s latest poll on the subject, from June 2020, finds that 55 percent of Americans own stock—but only 42 percent of Black Americans own stock, and even fewer Hispanics (28 percent). Employee ownership programs can deliver robust retirement options for American workers: A 2018 survey of ESOP participants showed their average total retirement balance to be twice that of Americans nationally.

At DAI, economic development is what we do, and we know that the world has a proven engine of prosperity in capitalism: responsible capitalism, regulated capitalism, and a capitalism tempered by the rule of law and the institutions of social care and social justice. But as we embark on the third decade and second economic crash of the millennium, we must add another to the list of capitalism’s necessary qualifiers: inclusiveness. If capitalism does not lift more boats, it runs the risk of being its own worst enemy. In the United States, the most unequal of the G7 nations, more than 60 percent of people believe there is too much inequality (78 percent of Democrats). And young Americans’ opinion of capitalism “has deteriorated to the point that capitalism and socialism are tied in popularity.”

The good news is that we have part of the answer right in front of us. Employee ownership is good for companies, good for workers, and good for a society that values shared prosperity. As a CEO, I’ve seen the benefits of my own firm’s experiment with active employee ownership; as an American, I would love to see more willingness to experiment on a national scale.

Read more stories by James Boomgard.