What Does “Employee Ownership” Mean?

Thomas Dudley

Culture

5

 MIN READ

Barber in front of his store

Employee ownership is in the spotlight. State and federal legislation has recently advanced to promote the model. Articles discussing the advantages of employee ownership have appeared in Forbes, Nonprofit Quarterly, and Harvard Business Review. Mainstream investors are even starting to take notice with large private equity firms exploring how employee ownership could enhance their acquisitions.

But what exactly does “employee ownership” mean? The big idea behind employee ownership is to distribute the rights and responsibilities of business ownership more broadly. Generally these rights and responsibilities fall into three categories.

1. Ownership & Money

All forms of employee ownership involve expanding financial opportunity. Workers build wealth through participation in capital accounts and/or profit sharing. Common examples include stock granted through an Employee Stock Ownership Plan (ESOP), shares bought through an Employee Stock Purchase Plan (ESPP), equity upside accessed through grants of stock options, and cash received through profit sharing distributions from an Employee Ownership Trust (EOT) or Worker Cooperative. Regardless of the structure, employee ownership creates alignment by ensuring that employees benefit financially when their company is successful. 

A key feature across all forms of employee ownership is that participation must be ”broad-based.” Access to ownership must be open to everyone at the company and the concentration of ownership must be limited. In some cases employees are expected to pay for their ownership stake, but more frequently it is a benefit of employment. The broad-based nature of employee ownership is critical to creating the environment of trust and respect that characterizes successful examples of the model.

Stories of workers building life-changing wealth present an inspiring case for employee ownership. Two examples covered in a past post illustrate this well. First is WinCo Foods. After 40 years as an ESOP, the 130 workers at a single store in Corvallis, Oregon had a combined $100M in ownership wealth, and across the company, over 400 front-line employees were “millionaire grocery clerks.” Second is Springfield Remanufacturing Company (SRC). From 1983 through 2017, the company paid nearly $100M in distributions to its employee-owners. SRC’s CEO, Jack Stack highlights one person who “started here in 1983 making $7.50 an hour [and] has now got $1.2 million.” While the plural of “anecdote” is not “data,” most of the ESOPs I have spoken to that are at least 25 years old have created front-line millionaires. 

To demonstrate that these stories are not one-off examples, but instead point to the transformative potential of employee ownership, I teamed up with Professor Ethan Rouen of Harvard Business School to answer the question: what would happen to wealth inequality if every American business became employee-owned? We found that this shift would reduce wealth inequality to recorded lows and the wealth of the median household would nearly double from $121,760 to $230,076. The potential to build broad-based wealth is the common thread connecting all corners of the employee ownership community. 

2. Ownership & Operational Decision Making

The second major aspect of ownership is operational decision making. Many employee-owned companies set up practices that expand employees’ voice in setting day-to-day processes, encourage them to generate new ideas, or even increase their role in setting the company’s overall direction. Increased involvement in decision making often goes hand-in-hand with education about financial literacy and open book management. 

The idea is that providing workers with increased agency, access to information about the business, and the knowledge required to use this information can help them better think and act like owners, which will then improve company performance. These practices are often implemented as part of a comprehensive system such as The Great Game of Business, GRITT, or the Entrepreneurial Operating System. As an added benefit, these systems can create a more engaging and enriching environment for employees, which can also increase retention. 

Academic research has found substantial benefits associated with high-involvement decision making practices at employee-owned companies. Studies over the past few decades have observed higher sales growth, profitability, and survivability. A key takeaway from this work is that financial ownership alone is not enough to alter company performance. 

These research findings align with intuition. A company's performance is the result of all the actions taken each day by everyone at the company. Because of this, changes in behavior are necessary to see changes in outcomes. Giving employees shares of stock without creating the conditions for behavioral change seems unlikely to impact company performance. That’s why many see employee involvement in decision making as going hand-in-hand with the financial aspects of employee ownership. 

3. Ownership & Governance

The third major aspect of ownership is governance. At some companies, workers play a role in nominating, electing, and potentially serving on the board of directors. The most common way to implement employee involvement in formal governance is through a worker cooperative. While details vary by company, the key feature of a worker cooperative is that worker-owners elect the board democratically, on a one-person, one-vote basis. In theory, this creates a situation where workers control the organization, and management is formally accountable to the workforce. Based on our list of employee-owned companies, I estimate that currently around 7% of employee-owned companies have some employee involvement in governance.

Employee Ownership in Practice

In practice there are as many different approaches to employee ownership as there are employee-owned companies. For many, employee ownership is purely about wealth-building. But others see the financial aspects of ownership and the day-to-day involvement in decision making as inseparable. 

The specific meaning of employee ownership can even evolve within the same company over time. For example, a company might begin their employee ownership journey through a succession plan for a departing founder and with an initial focus on long-term wealth building. But as debt is paid down, shares are distributed, and employees start to see what’s at stake, leadership might become interested in increasing financial literacy and opening up the books to help employees become even more engaged as owners. 

Once we recognize the different facets of employee ownership, a new question arises: what does it mean to say a company is “employee-owned?” This might seem like the same question we asked at the beginning of the article but, as we’ve discussed previously, having some employee ownership doesn’t necessarily make a company employee-owned. Consider a company that distributes a small portion of its stock to executives, or a company that provides increased voice without providing any sort of financial benefit. Are they “employee-owned?”

Creating a simple and clear definition of employee-owned was the first major challenge we faced when launching Certified Employee-Owned. After speaking with roughly 250 members of the community, including trade associations, service providers, and of course companies, we arrived at a definition that focused specifically on the financial aspects of employee ownership. We felt this big tent view would maximize our ability to build support for the model while ensuring that employees at companies we certify have the opportunity to build life-changing wealth. You can read the full account of how we set a standard meaning for “employee-owned” here.

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