The ESOP Revolution

In my research on purpose-driven businesses and stakeholder capitalism, one of the most important themes I have encountered is the transformative power of employee ownership. 

Kimberly Jones, president of 100% employee-owned marketing agency Butler/Till for instance describes the impact of employee ownership like this “employee ownership is perhaps the best-kept secret of our economy. It strengthens communities, fosters a financially savvy workforce, increases resiliency during recessions, and offers big benefits during economic booms. It’s a sound choice economically, with several tax and financial incentives to its name. It also empowers employees to think and act like owners, which results in an engaged workforce, happy customers, and sustainable financial success that in turn benefits the community.”

Furthermore, employee ownership is an important way to overcome economic inequality. While I was doing research for my recent book, sustainable business pioneer Jeffrey Hollender, co-founder of Seventh Generation told me: “I don’t think you can be a responsible business without being committed to employee ownership, because otherwise your business acts as a way to concentrate wealth,” and that, “Responsible businesses have to take that head on, get over their fears about giving employees access to their financial statements, and understand they’re being agents of wealth concentration if they’re not committed to employee ownership.”

This is an incredibly important point. While there are many ways that businesses can be sustainable and socially responsible, even for the best of businesses, if they are organized with traditional ownership structures (e.g. publicly traded, VC/PE  owned, family owned, LLCs) they will systemically funnel a disproportionate amount of the gains to such owners and so only serve to increase the economic inequality problems that plague our world. So, while their products may be environmentally friendly and produced in ethical ways, at the end of the day, if such companies have traditional ownership structures, they will also be contributing to an increase in economic inequality.

I have heard similar sentiments from other leading employee owned companies I have written about including Global Prairie, Fireclay Tile and King Arthur Flour. So I was quite excited learn about a new book on the topic, Create Amazing: Turning Your Employees into Owners for Explosive Growth by Greg Graves, who recently retired as Chair/CEO of Burns McDonnell Engineering an employee-owned construction and engineering services company. I recently had a chance to ask Greg about his experience with employee ownership and why he believes it is important for not only businesses, but society more generally.  An edited excerpt of our on-line interview follows. 

Christopher Marquis: How did you learn about employee ownership and why did you implement this ownership structure at Burns & McDonnell Engineering?

Greg Graves: In the 1970s, Burns & McDonnell was sold to Armco Steel after two generations of family ownership. By the mid 1980s, the American steel industry was in free fall and Armco made the decision to sell off some of its non-core divisions. The Burns & Mac’s leadership was determined not to be ‘sold off’ to yet another corporate giant and learned that it could possibly return to self-ownership through an Employee Stock Ownership Plan (ESOP). 

Significant obstacles awaited including securing financing, selling the idea to the existing 640 employees and convincing Armco to accept a slightly more complicated although tax friendly exit. Fortunately for the current almost 7000 employee owners, each obstacle was overcome and one of America’s most successful employee-owned firms was born. 

Marquis: What differences did being an ESOP bring to employee engagement, commitment and performance?

Graves: During my 36 years there including 13 as CEO, I saw the differences on the ground level, and they are profound. But thankfully, ESOPs aren’t just better for the people who work there, they are equally better for the firm as a whole, not to mention for American competitiveness in total. These advantages are not just possible they are predictable largely thanks to the ongoing research at the Rutgers School of Business’ Institute for the Study of Employee Ownership and Profit Sharing. They have found that for nearly all firms, turning workers into owners will lead to institutional improvements in productivity, turnover and employee satisfaction. At Burns & McDonnell, we had years where unwanted turnover of senior employees was nearly zero. 

What leaders should also consider, however, is that workers who become owners will also have higher and higher expectations for those same leaders. They will have high expectations for the success of their firm and will expect their firms to become great places to work, not just great places to retire from. 

Marquis: How can ESOPs be used to address economic injustice caused by wealth disparity?

Graves: Wealth inequality in America has not been this bad since the 1776 version of Europe the Founding Fathers left behind. It is unacceptable. In America today, 1% of American families have fifteen times the wealth of the entire bottom 50%. We solved this once. We should solve it again.

There is a lot to consider here including the non-working poor, access to healthcare and, critically, early childhood education. Certainly, the federal minimum wage should be debated thoughtfully and thoroughly. 

Create Amazing offers a third leg of opportunity to the stool…another 100 million workers turned into owners vs the 14 million who exist today. This would create, predictably, American capitalism on steroids and, more importantly, would assure that the success of this greater capitalism was equitably shared with all who made it possible. Create Amazing does not argue for the redistribution of wealth in America. In fact, it argues directly against it. Generational wealth should be earned…but it can be, one employee owner at a time.

Marquis: What can the government do to promote employee ownership?

Graves: Usually when I get this question, I quickly answer…just do nothing but stay out of our way. In this case, however, there is more and more that the federal and most state governments can do to the help the formation of ESOPs and clear the way to greater economic justice. The most important, without question, is to streamline the process by which existing private companies can transition to employee ownership including incentives to encourage these transitions and their financing options.

But again, please do no harm. It’s just as important that the current budget and tax revenue debate in Washington D.C. not have unintended consequences for ESOPs such as limiting qualified retirement savings or the short-term thinking that often comes with offsets. As with any form of ownership, ESOPs prosper as the economy prospers…but thankfully, in a more just way.

Marquis: If a company wants to become employee owned, what are some of the initial steps they should do?

Graves: Always start with Why?

Whether or not to make the big leap to employee ownership must begin with having the right ‘Why.’ Love for your people, American competitiveness, economic justice…all good starters. 

After ‘Why’ there are many sources for information including The ESOP Association, the Employee S-Corporations of America and the National Center for Employee Ownership. Of course, there are also several terrific books on the subject from academia to experienced CEOS. After a lot of reading and likely, some soul searching, my first step would be to hire a great ESOP attorney…the key here is someone who specializes every day in the special fiduciary duties that come with an employee-owned firm.

What you will find, I promise, is that the road forward is clear but not simple. In fact, I guarantee you this won’t be easy, but I also guarantee that it will be worth it. Done right, turning workers into owners will lead to explosive growth…for you, for your firm, for our country.

As seen in Forbes and written by Christopher Marquis.