Defining “Employee-Owned”: How We Set Our Certification Standards

Thomas Dudley

Employee-Owned

 MIN READ

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At Certified Employee-Owned, our mission is to build an employee-owned economy by creating national recognition for employee ownership. When starting Certified EO, in 2016, my co-founder Kramer Sharp and I were inspired by the success of programs like Fair Trade and Great Place to Work. We saw certification as a way to amplify the voices of employee-owned companies with a unified brand that would make it easy for job seekers, consumers and businesses to find and support employee-owned companies.

As we have grown to over 400 Members, we have started to see our vision come to pass. But, we have also seen how employee ownership is an idea that takes different forms at different companies. Given all the nuance, what exactly do we mean when we certify a company as “employee-owned”? This article walks through how we created our certification standards, including:

  • Why did we need to define “employee-owned”?
  • Common threads from community conversations
  • Focusing on wealth building
  • A specific and simple definition of employee-owned

Why Did We Need to Define “Employee-Owned”?

The idea to create a certification program for employee-owned companies came out of work I was doing as a PhD student at Stanford Business School. I joined the Organizational Behavior department in 2013 with an interest in understanding alternative business structures. In my first year, my advisor pointed me in the direction of the academic work on employee-owned companies. I was excited to see that a group of scholars had spent years studying this model and thrilled that their findings demonstrated increased firm performance and better outcomes for employees.

While absorbing this large body of work, I had frequent conversations about what I was learning with a long-time friend, Kramer Sharp. The more we talked about employee ownership the more excited we became about this unique business model. But we kept coming back to the same question: Why have we never heard of this before?

As we explored employee ownership, we noticed that, much to our surprise, many companies we already knew and loved were employee-owned. We also started to get to know the amazing community of companies and service providers powering this transformative model and were struck by their passion and commitment. But being new to the space we were confronted with the difficulty of finding employee-owned companies. Getting a rough list of companies required digging through government filings, and even that list was incomplete. It became clear to us that a major obstacle preventing more people from joining and supporting the EO Community was lack of visibility.

Thinking about ways to build  awareness of employee ownership, we were inspired by the success of certification programs like Fair Trade and Great Place to Work. They demonstrated that certification is a proven model that combines the reach of companies with a common trait to create national recognition. We thought that increasing the visibility of employee-owned companies would make them the employer of choice for millions of job seekers and make being employee-owned a major differentiator with clients and consumers. But creating a certification requires making a yes/no decision about who is eligible to join, so before we could start building towards our vision we had to set down concrete certification  standards. In other words, we had to define “employee-owned”.

Common Threads From Community Conversations

In 2016 when we set out to create our certification standards, the ESOP model was already over 40 years old. Shining light on the employee ownership community was the entire point of the certification, so we knew that we had to ground our definition of “employee-owned” in community input.

We started by connecting with the major trade associations including the National Center for Employee Ownership, The ESOP Association, Employee-Owned S-Corporations of America, and the US Federation of Worker Cooperatives. We attended conferences to speak with service providers including lawyers, accountants, bankers, and consultants who create and administer employee ownership plans. And of course we contacted as many employee-owned companies as possible. Over the course of the year we had over 250 conversations about what it means to be employee-owned.

It’s no surprise that we heard a variety of perspectives. For some companies employee ownership is about giving everyone a financial stake in the success of the business. Take WinCo Foods as an example. They have had broad-based employee ownership for over 30 years and in the process they have created many millionaire grocery clerks. Some companies see employee ownership as encompassing both share ownership and employee involvement in operational decision making, for example open-book management. A few companies even see employee ownership as including employee-owners having a say in important governance issues. For example, Worker Cooperatives give their worker-owners equal votes in electing the board of directors. These three aspects of ownership - money, operational decision making and governance - were the common threads running through what we heard from the EO Community.

Focusing on Wealth Building

It only took a few conversations for us to see that it would be impossible to come up with a single  definition of “employee-owned” that would include everything that everyone saw as important. While money, operational decision making and governance were the common threads, everyone we spoke to had a different opinion on their relative importance. Instead, we started looking for a baseline. What were the aspects of employee ownership that would be broadly seen as necessary? If a company did everything BUT one particular practice would they still be viewed as employee-owned? With this shift in perspective, one element stood out: wealth building for working people.

A focus on wealth building also aligned with the notion advanced by many Founding Fathers, and articulated best by Thomas Jefferson, that a healthy democracy depends on broad-based property ownership. While in Jefferson’s time this meant ownership of agricultural land, employee ownership updates this notion for our modern world where the largest asset held by the wealthiest households is the ownership of business. While operational decision making and employee involvement in governance can be positive, the broad-based ownership of wealth stands apart in importance for individuals as well as our country.

A Specific and Simple Definition of Employee-Owned

With our direction focused on wealth building, we distilled the community input down into a common set of standards we could use to certify a company as “employee-owned”:

  1. Ownership: At least 30% of the company must be owned by employees. Shares held by company founders do not count towards this threshold.
  2. Access: Reasonable access to ownership must be open to every employee at the company.
  3. Concentration: The ownership held in line with #1 and #2 must not be over-concentrated. This is controlled either through a cap on the maximum distribution or a maximum ratio between maximum and median distribution.

It’s important to acknowledge that our standards are not perfect. For example, we’ve spoken with a company where employees hold a 10% stake that meets the access and concentration components of our standards. They were quick to point out that it could be much better to own 10% of a successful company than 100% of a failing business. There is merit to that point, but at the same time, 10% is not enough to call a company “employee-owned”.

Others have told us that our standards are too low. Why not set the bar at a majority ownership stake? There are actually a few strategic reasons for an employee-owned company to keep ownership below a majority that benefit the company and by extension the employee-owners, for example maintaining government purchasing preferences. The 30% threshold is also aligned with historical legislation, for example Section 1042 of the Internal Revenue Code. But the biggest reason is that 30% employee-owned is actually a high bar. According to the U.S. Census Bureau there are roughly 1.3 million firms in America with at least 10 employees. We estimate there are approximately 6,000 companies that meet our certification standards. That means fewer than 1 in 200 businesses met our definition of employee-owned - less than half of one percent!

Ultimately we made peace with setting imperfect standards because the mission of Certified Employee-Owned is to build an employee-owned economy. We are not trying to be the arbiters of who is a “good” company and who is a “bad” company. We see certification as a means to an end, and creating a certification program requires a definition of who does and does not qualify. No single definition of employee-owned will ever be perfect, but there is tremendous benefit to the employee ownership community if we can create national recognition. Uniting our voices will help millions of Americans see the value of this model, create a resource that benefits our community, and increase the number of employee-owned companies.

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