Why this organization is pivoting from helping people get jobs to helping them own businesses

For most of Social Capital Partners’ 19-year history, we’ve focused on income and employment: helping people facing systemic barriers find good full-time work. And we’re still passionate about that topic — our workforce expert, Judy Doidge, continues to support many terrific demand-led employment and training programs. But the unfair outcomes that lead to ever increasing wealth inequality have two components: income inequality and capital or ownership inequality. Over the last couple of years we’ve started thinking more about the ownership side.

Rightly or wrongly, our observation is that a great many of the non-profit or charitable efforts to increase economic opportunity and reduce inequality are on the income side. Public policy also focuses there: universal basic income, tax policy, minimum wage increases, etc. aim to increase low incomes. And we’re supportive of these efforts, but, other than affordable housing, few seem focused on ownership, and frankly, most affordable housing initiatives involve creating affordable rental options rather than ownership options. With asset ownership consolidating in fewer and fewer hands, there just aren’t many people with any real wealth, let alone the wealth needed to manage a crisis such as COVID-19. Finding and developing new ideas to help broaden ownership to more people and increase economic resiliency seems increasingly urgent, so we decided to dig in.

Interestingly, when we started talking to people about this, and framed it as being about wealth inequality, it certainly wasn’t a burning platform for everyone in Canada (“we’re not as bad as the U.S., amiright?”). But we’re seeing that shift. Not only is there new data that suggests Canada may actually be among the most unequal in the OECD, but COVID-19 has brought that inequality into stark relief. As SCP adviser Roger Martin discusses in his recent book, at some level of inequality, democratic capitalism simply isn’t sustainable. We don’t know exactly what that level is, but based on some recent elections, it’s safe to say we’re getting pretty close.

So, we’ve spent time looking for scalable and sustainable ways to provide accessible business ownership to the broadest possible group of people. And the best thing we could find was employee ownership. Specifically, U.S.-style employee ownership.

U.S.-style employee ownership is a game changer

The success of American employee ownership is impossible to deny. U.S.-style Employee Stock Ownership Plans (US-ESOPs) enable owners to sell shares to their workers at fair market value, funded by debt, and at no cost to employees. They are broad-based, requiring shares to be distributed to almost all employees, and not just top management. Since they were established in 1974 a bi-partisan consensus in the U.S. has provided more and more incentives to promote their use. And as a result there are currently about 6,400 employee-owned companies in the U.S., with 14M employees sharing in $1.4 trillion in wealth. Yep, trillion. With a T. Well-known companies, such as Publix, Gore (makers of Gore-tex) and Clif Bar have significant employee ownership.

One of the great things about US-ESOPs is they’ve been around a long time and have been well studied. It turns out they grow faster, are more profitable, are more resilient in downturns, stay in their communities longer and pay their employees more before you take into account their share ownership. And when you do include their share ownership, US-ESOPs have proven to be a powerful wealth creating engine for many workers who otherwise have no access to ownership. According to one study, employee-owners have 92 percent more wealth than equivalent employees at other companies and many front-line U.S. employees have retired with $1M+ payouts.

They’re also a terrific succession option for business owners, which is crucial at a time where a majority of owners of private companies in the U.S. and Canada are approaching retirement. Selling to a US-ESOP allows owners to protect the legacies they’ve built, preservejobs in their local communities where they will continue to live, reward their employees and receive a fair return for their companies. 

They’re also a terrific succession option for business owners, which is crucial at a time where a majority of owners of private companies in the U.S. and Canada are approaching retirement.

For our Canadian readers, US-ESOPs aren’t the same as the “ESOPs” you’re familiar with in Canada, which stands for Employee Stock Option Plans and are mostly meant for upper management. Nor are they stock purchase plans, which allow employees to buy shares at a discount or funded by company loans. The critical feature that makes them especially useful is that they don’t require employees to have any current wealth, or even any disposable income, to participate, and there’s no downside risk for the employee. A few useful references on US-ESOPs are this website, this video, this website, this podcast and this terrific report.

US-ESOPs have proven to be scalable and sustainable, and because all employees participate and don’t pay for their shares, they’re also accessible. This meets all three of our criteria for broadening business ownership.

SCP’s two-pronged employee ownership strategy

So, where do we come in at Social Capital Partners (SCP)? In two ways.

First, we are working with major Canadian pension funds to invest in U.S.-based employee ownership. Despite the success in the U.S. to date, there’s still a major gap preventing even more employee ownership growth: a lack of debt capital. That means that currently, a disproportionate number of business ownership transitions are sold to private equity instead of to ESOPs. But the capital needed is actually a great fit for the investment criteria of pension funds, who are always looking for new ways to invest. We’ve been building relationships with US-ESOP advisors over the last year, and if we can demonstrate how pension money can be used to support employee ownership while generating an attractive return, we think we can move billions of dollars into the sector, resulting in billions (trillions? why not!) more in employee wealth. We think it’s a huge opportunity: more detail on our approach is here.

The second thing we’re doing directly addresses the obvious question: why isn’t SCP doing this in Canada? The answer is simple: we can’t. Canada’s employee ownership environment sucks. Canada provides no incentives to support employee ownership, and provides no corporate structure comparable to US-ESOPs. There are some worker co-ops (400 or so employing about 5,000 people) and some companies have worked very hard to overcome the bad regulatory environment and provide employee ownership anyway (such as EllisDon, Friesen’s, Beau’s and PCL). There are option plans and share purchase programs, but these are generally targeted at upper and mid-management and often used by large, publicly-traded companies (i.e. not broad-based and big miss on accessible). The U.K. was similar until 2012, when they commissioned a major study that resulted in new rules and incentives in 2014 that have jumped-started EO; employee ownership in the U.K. is up 150 percent since then.

So, we’re starting a campaign to change Canada’s employee ownership policies. As we look to rebuild our economy after the very unequal devastation of COVID-19, employee ownership should be an integral part of an inclusive growth agenda. Not only is it proven to provide opportunity for employees to build wealth, it protects local jobs, increases company resilience in downturns and provides an answer for Canada’s coming business succession crisis as baby boomer business owners start to retire. It’s just smart, evidence-based public policy. We recently published a report — ”Building an Employee Ownership Economy” — all about it. 

And, while employee ownership provides the fastest way to scale ownership opportunities to people who don’t otherwise have access, it isn’t the only one. We’re also looking for other platforms that broaden ownership opportunities while meeting the three criteria we identified above: scalability, sustainability and accessibility. We’ve been working on a few additional concepts ourselves. And, as we see broadening ownership as a new front in the fight against inequality, we look forward to discussing any new ideas with the broader impact community.

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