Certified EO Blog
Defining “Employee-Owned”: How We Set Our Certification Standards
March 21, 2022
At Certified Employee-Owned, our mission is to accelerate the creation of an employee-owned economy by building support for employee ownership. Inspired by Fair Trade and Great Place to Work, Kramer Sharp and I started Certified EO in 2016 because we thought certification would coordinate and amplify the voice of the employee ownership movement. As we have grown to over 500 Members, we have seen how employee ownership is an idea that takes many different forms at different companies. Given all the nuance, it’s important to articulate what it means to certify a company as “employee-owned” and how we set this standard. This article walks through our journey to create a specific and clear definition of employee-owned and details what we learned along the way:Why it’s important to define “employee-owned”Themes from over 250 community conversationsWealth building unites our communitySetting a standard that people know and trustWhy it’s Important to Define “Employee-Owned”The idea for Certified EO grew out of my work 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 learn about the model and thrilled that research demonstrated the potential for increased firm performance and better outcomes for employees. While absorbing this 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 interested we became in this unique business model. We were delighted to find that many companies we knew and loved were employee-owned. We were also inspired by the passionate service providers powering this transformative model. But we kept coming back to the same question: Why had we never heard of this before?Reflecting on our experience, it became clear that a major obstacle for the employee ownership community was lack of visibility. Finding employee-owned companies was a challenge. Some employee-owned companies were talking about it, but many were not. Worse, some companies were saying they were employee-owned when clearly they were not. There was no official list and the closest thing we could find required digging through government fillings. But even that list was incomplete. There simply was no easy way to find employee-owned companies.Kramer and I began thinking about ways to create a bridge between employee-owned companies and the general public. Looking at Fair Trade and Great Place to Work, we realized that certification is a proven model for coordinating and amplifying the voice of a movement. Combining the reach 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 program means creating a standard that people know and trust. So before we could start building towards our vision we had to define “employee-owned.”Themes From Over 250 Community ConversationsAt this time, the ESOP model was already over 40 years old. Kramer and I knew that we had to ground the definition of “employee-owned” in the practices and views of the community. 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 2016 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. WinCo Foods, for example, has had broad-based employee ownership for over 30 years and in the process has created millionaire grocery clerks. Other 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 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 our conversations with companies and advocates. Wealth Building Unites Our CommunityIt took about five conversations for us to see that it would be impossible to come up with a single definition that would include everything that everyone saw as important. While money, operational decision making, and governance were the common threads, everyone had a different opinion on their relative importance. So we started looking for a baseline. What were the aspects of employee ownership that would be broadly seen as essential? 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. Everyone we spoke to mentioned wealth building as a critical aspect of employee ownership. We heard many stories of long-time employee-owners in front-line roles building substantial wealth. Companies with diverse employee ownership structures including Employee Stock Ownership Plans (ESOPs), Worker Cooperatives, Employee Ownership Trusts (EOTs), and the various Direct Share Ownership Models all include some combination of profit sharing and capital accounts that help employees build wealth. Others pointed out how broad-based wealth building aligns with the fundamental promise of America as a land of opportunity. While operational decision making and employee involvement in governance can be positive, the wealth building for working people stands apart in importance for individuals as well as our country. Setting a Standard That People Know and TrustWith our direction focused on wealth building, we arrived at a set of standards that captured the common practices and was aligned with historical legislation:Ownership: at least 30% of the company must be owned by employees. Shares held by company founders do not count towards this threshold.Access: reasonable access to ownership must be open to every employee.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 some things get lost when you simplify a complicated concept like employee ownership down to a binary of certified or not. 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 might 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 they felt our standards were too low. Why not set the bar at a majority ownership stake? There are a few strategic reasons for an employee-owned company to keep ownership below 50%, for example maintaining government purchasing preferences. The 30% threshold is also aligned with historical legislation, for example Section 1042 of the Internal Revenue Code. Our research shows that if every business became 30% employee-owned, wealth inequality would decrease to historic lows and the wealth of the median household would increase nearly four times. While 30% might sound low to some, it’s a very 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 the goal of Certified Employee-Owned is to accelerate the creation of an employee-owned economy. Creating a standard that people know and trust is a means to an end. What matters most is that our standard is clear, easy to understand, and applied consistently so that it creates a bridge between the companies and the community. Uniting our voices through certification 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. There has never been a more important time to build an employee-owned economy, and we’re thrilled that we can do our part through certification.This article was originally posted 3/21/22. It was updated on 1/5/2023.
Read More ▶The Difference Between “ESOP” and “Employee-Owned”
February 16, 2022
If you’ve spent time learning about employee ownership, then you’ve certainly heard of Employee Stock Ownership Plans, or ESOPs. In fact, ESOPs are so common among employee-owned companies that many people use these terms interchangeably. You might be surprised to learn that, while ESOPs are certainly the most common type of employee-owned company, there is actually quite a bit of daylight between the two concepts. Not all ESOPs are employee-owned, and not all employee-owned companies have an ESOP. This article walks through the differences between “ESOP” and “employee-owned” including: Quick Background on ESOPs Not all ESOPs are Employee-Owned Many Employee-Owned Companies Don’t Have an ESOP Defining “Employee-Owned” Stronger Together Through Certification Quick Background on ESOPs ESOPs have grown dramatically since their creation in 1974 as part of the Employee Retirement Income Security Act (ERISA). According to the Department of Labor, there are currently around 6,300 companies with an ESOP. They range in size from dozens of employees to hundreds of thousands and operate in every industry imaginable. The ESOP’s popularity is due to a number of factors, including nearly 50 years of proven success, strong tax benefits, and a fantastic community of advocates and service providers. By law, ESOPs are extremely inclusive. The basic idea behind an ESOP is that it is a trust that owns company stock on behalf of a broad-based group of employees. Shares are usually allocated to eligible employees annually, and the eligibility criteria employees must meet to receive a share allocation are very open. Typically employees need to work 1,000 hours in a year to participate, an average of only 20 hours per week. Additionally, ESOP shares are paid out of company profits and are allocated to employees at no cost. These open criteria drive high participation and ensure that workers at ESOP companies benefit when their employer is successful. Not all ESOPs are Employee-Owned While all ESOPs are broad-based, the percentage of total outstanding stock owned by the ESOP varies dramatically from company to company. There is no minimum, and in practice we’ve seen this range anywhere from a fraction of a percent to 100%. Of course, an ESOP that owns even just a tiny piece of a large and successful company can provide a great benefit to employees, especially since employees are not paying for the shares out of their wages. But there is a categorical distinction between a company operating a small broad-based, share-ownership plan as a benefit and a company where the employees own a substantial portion of the stock, perhaps even 100%. In other words, there is a difference between having an ESOP and being employee-owned. Further clarity can be gained by looking at a specific example. In the publicly available Form 5500 data, the largest company indicating they have an ESOP is Walmart. To be sure, that ESOP must be a nice benefit for some of the company's employees. However, it probably is not having the same impact as the ESOP at 100% employee-owned WinCo Foods, which has made many front line employees into millionaires. WinCo is just one of many inspiring stories of employee-owners building life-changing wealth. That’s why it’s important to remember that having an ESOPs doesn't always mean a company is employee-owned. Many Employee-Owned Companies Don’t Have an ESOP While the ESOP model is the most popular and successful structure used by employee-owned companies, it is not the only option. There are a number of alternative ways to implement significant and broad-based employee ownership, including Worker Cooperatives, Employee Ownership Trusts (EOTs), Employee Stock Purchase Plans (ESPPs), and equity compensation plans like stock options. Companies can even implement employee ownership through direct share ownership, though there are often benefits to using a more formal structure. Alternative structures play an important role in building an employee-owned economy because not every company is a good fit for an ESOP. Some selling owners want more flexibility. Others might want to ensure employees have a strong voice in governance. But perhaps the most promising use case for alternative structures is helping smaller companies become employee-owned. The setup and administrative costs of an ESOP can be prohibitive for companies under 40 people. In recent years we’ve seen a growing number of small companies using EOTs, direct share ownership, and even stock options. This encouraging trend could greatly expand the employee ownership community. Defining “Employee-Owned” If not all ESOPs are employee-owned and many employee-owned companies don’t have an ESOP, then it begs the question: How do you define employee-owned? Answering this question was priority number one when we started Certified Employee-Owned. Our vision from the very beginning has been to use certification to accelerate the creation of an employee-owned economy. Programs like Great Place to Work and Fair Trade show that certification builds support by amplifying the voice of the movement. We quickly realized that, while companies with different employee ownership structures have distinct administrative and legal concerns, they would all benefit from the visibility created by certification. With this big-tent vision in mind, we set out to create a definition of “employee-owned” that could be applied to any ownership structure. We searched extensively for historical precedent and had over 250 conversations with companies and advocates. Ultimately, we identified financial ownership as the common thread running through legislation and views of advocates from across the space. With that in mind, we focused our definition on three concepts: Ownership: At least 30% of the company must be owned by employees (excluding founders) Access: Reasonable access to ownership must be open to every employee Concentration: Ownership among employees cannot be too concentrated Stronger Together Through Certification It’s important to emphasize that the point of this definition is not to determine who is a “good” or “bad” company. Ultimately we are focused on what certification can accomplish for the employee ownership community and a necessary part of any certification program is a specific and clear delineation between who does and does not meet the standards. Setting a standard people know and trust has intrinsic value, but it also enables the creation of shared resources. Our Directory of Employee-Owned Companies is an up-to-date list of every company we know of that, to the best of our knowledge, meets the above definition of employee-owned. The directory create a simple way for people to find employee-owned companies, but it’s only possible with a clear definition of employee-owned. Our certification mark is the strongest way for a company to communicate that they meet high standards of significant and broad-based employee ownership. Over one hundred Members are using the mark on their websites and major companies like WinCo Foods and Litehouse are using the mark on widely circulated products and packaging. The foundation of this branding initiative is the trust created by third-party certification. Certification is changing the game for the entire employee ownership community, including ESOPs, and that’s why it’s important to understand the difference between “ESOP” and “employee-owned”. This article was originally posted 2/16/22 and was updated on 3/28/2023.
Read More ▶10 Reasons Business Owners Have Transitioned to Employee Ownership
January 20, 2022
Since launching Certified Employee-Owned in 2017, I’ve spoken to over 1,000 employee-owned companies. These conversations are the highlight of my day. I love hearing stories about entrepreneurs starting companies and I'm always curious to learn how founders have come across employee ownership. Spending so much time talking to entrepreneurs and leaders in the employee ownership space has shown me a few interesting trends. Most notably, the vast majority of companies I have spoken with did not start out as employee-owned, but transitioned after many years in business. I haven’t kept exact numbers, but I would estimate this is the case with over 95% of the companies I know. While there are as many reasons for conversion as there are founders, there are a few trends that stick out. Here are 10 reasons that stand out as to why business owners have made the transition to employee ownership, along with a paraphrased story for each one that captures the essence of the journey: 1. Keeping it in the family“ Starting this company was my dad’s greatest accomplishment and growing the business has been my life’s work. But none of my kids were interested in taking the reins. I know what can happen when a company is taken over by a strategic or private equity and I didn’t have the heart to do that to people I’ve known my entire life. Transitioning to 100% employee-owned was my way of keeping the company in the family.” 2. Giving our owners partial liquidity“ To me going 30% employee-owned was a no-brainer. I got some liquidity, and now my people have a direct stake in the action, so the company is doing even better. As a bonus I have a built in succession plan. I don’t have any plans to step back, but you never know what will happen and it’s great to have that option.” 3. Continuity through succession“ This company was her baby, she wasn't going to sell it. She really liked the idea of leaving the company in the hands of the employees, because the alternative was going the way of other companies that she had seen bought out and changed completely.” 4. Staying an anchor in our community “Our founder was deeply concerned with what would happen to the local economy. He knew that if he sold to a strategic buyer, they would move the headquarters and maybe even the factory. We’re the biggest employer in the area so that would have devastated the town. By transitioning to EO our founder kept us local and kept the town alive.” 5. Start-up business sharing equity “A lot of start-ups share equity with talented employees in exchange for under-market wages, but my vision for sharing equity in the company was different. I wanted all my dedicated employees to have skin in the game from the beginning. The set formulas for sharing equity with only early employees didn’t work for me.” 6. Aligning employees at a time of growth “After years of start-up hustle, we were finally poised to take our company to the next level, and employees were going to be critical to our growth. We wanted to align the interests of owners and employees by giving employees a stake and a better understanding of what makes our company tick.” 7. Finding alternatives to private equity“ Private equity started knocking at our door and it made us think critically about the future of our company. We believe in our mission, our people, and the services we provide and are not willing to compromise those to get the highest dollar. Some of our shareholders were pressuring us for liquidity, and we needed to figure out how to provide that without overburdening the company with debt.” 8. Mission-driven at our core “We have been mission-first since day one. I started the business to help us transition to a sustainable future. Growing the company and making money has always been an outcome of our success, not a goal. I transitioned us to employee-owned to lock that mission-focus into our DNA. I want everyone here to have a stake in our future and to feel as bought-in as I feel as the founder.” 9. Feeling alone at the top “I did not expect to become a solo entrepreneur running a company by myself. I always wanted to do this as a team. I don’t have a co-founder anymore, and I want everyone to be more bought in and engaged as co-owners of this business.” 10. Democracy at work“ We wanted to be a worker cooperative from the start. It is the only corporate structure that aligns with our values - that each worker should have equal say in the governance of the company. We are in this together and that should be reflected in every aspect of our structure and culture. ”Are you a business owner looking to learn more about employee ownership? A great place to start is our overview.
Read More ▶11 of the 100 Largest Private Companies in America are Employee-Owned
April 13, 2021
Forbes curates a number of interesting lists, among them a list of the largest private companies in America [https://www.forbes.com/largest-private-companies/list/]. Today I was looking through this list and thought: how many of these companies are employee-owned? Using our new Directory [https://www.certifiedeo.com/companies], I found that 11 of the 100 largest private companies on the Forbes list are likely to be employee-owned. Two of them are Certified EO Members: * #23 Wawa * #53 WinCo Foods Nine others have a broad-based ownership program that, to the best of our knowledge, owns at least 30% of the company: * #5 Publix Super Markets * #55 Graybar Electric * #73 Sammons Enterprises * #74 Hensel Phelps Construction * #86 Schreiber Foods * #94 McCarthy Holdings * #96 Swinerton * #97 Kehe Distributors The fact that over 10% of the largest private companies in America are employee-owned is a powerful proof point that employee ownership works! The question for those of us that want to see employee ownership grow is: what would it take to get this number from 11 to 50?
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