1 Employee Ownership & Economic Sustainability Competitiveness, Inclusion, and Wealth Creation John Logue Professor, Kent State University Director, Ohio.

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Employee Ownership & Economic SustainabilityCompetitiveness, Inclusion, and Wealth Creation

John LogueProfessor, Kent State University

Director, Ohio Employee Ownership Center

113 McGilvrey Hall telephone: 330-672-3028Kent State University fax: 330-672-4063Kent, Ohio 44240 email: [email protected]://www.kent.edu/oeoc

Prepared for the External Advisory Committee on Cities and Communities,Theme: Economic Sustainability

OttawaApril 18-19, 2005

Ohio Employee Ownership Center

2Ohio Employee Ownership Center

I. The Landscape of Employee Ownership in the US and Ohio


Forms of employee ownership

1) Employee Stock Ownership Plans (ESOPs)

Tax advantaged retirement plans for employees

Invest primarily or exclusively in the stock of the employing company

Can borrow money

Must include at least 80% of permanent, full time employees (unless union opts out)

Consequently ESOPs are excellent tools for employees to buy companies and encourage broad ownership


Forms of employee ownership (continued)

2) 401(k) savings plans holding company stock• Frequently used in public companies

• The Enron problem

3) Broadly distributed stock options• Public companies: contingent compensation for

employees rather than long term ownership

• Closely held companies: Must be coupled with internal market


Forms of employee ownership (continued)

4) Direct employee stock purchase plans • No tax advantages• Sense of direct ownership

Some companies use ESOPs, options and direct purchase

5) Cooperatives • Fewer tax advantages• Fairly flexible • Most advantageous in smaller companies• “Born democratic” – members control the co-op


The employee-owned sector in the US today

Type of ownership Companies Employee-owners

Employee Equity

ESOPs 11,000 8.8 million $400 billion

Broad-based

stock options

4,000 8-10 million “several hundred billion”

401(k) Savings plans holding company stock

2,200 plans 11 million $160 billion

Stock purchase plans 4,000 15.7 million no estimate on value

Worker Cooperatives Several hundred perhaps 10,000 employees

no estimate on value


Employee ownership in Ohio

Context: Ohio is industrial state with population of 11.5 million and non-farm employment is 5.4 million – about a third the population and labor force of Canada


Employee ownership in OhioIn Ohio there are about 425 partially or wholly employee-owned companies with about 410,000 employee owners

• Median employment: 110-120 employees• Median sales: $15 million• Closely held: 85%• Majority employee owned: ca. 35%• Full corporate governance rights

for employees: 42%• Non-managerial employees on board

of directors: 17%• Automatic disclosure of financial

information: 48%• If no automatic disclosure (i.e., other 52%),

financials are available on request: 57%


Growth of the Ohio Employee Owned Sector

1993 2001

# of ESOP companies 295 403

# of employee owners 196,000 400,000

Value of employee equity $4.8 billion $27.2 billion

Source: IRS Form 5500 filings, Larkspur Data Resources


Reasons for employee ownership in Ohio (multiple reasons possible)

• ownership succession 58%

• divestiture of plants & divisions 11%

• averting shutdown or major job loss 5%

• blocking a takeover or purchase by another company 6%

• financing expansion of company 10%

• reducing borrowing costs 15%

• replacement of another benefit plan 10%

• additional benefit plan 35%

• philosophical commitment to employee ownership 44%


Why ESOPs are used in ownership succession

• Tax reasons: Owners of closely held businesses who sell 30% or more of the shares in the business to employees through an ESOP or a co-op can avoid the tax on the capital gain

• Fair price: Employees pay an appraised “fair market value” for the business

• Philosophy: Many owners would prefer to sell to their employees

• Financing: ESOPs provide low-cost financing for employee purchase


Advantages of employee ownership in succession

• Employees buy and continue successful businesses – rather than their being sold to competitors

• Purchase anchors jobs in community

• Continued local ownership maintains the higher local multiplier effect


II. Employee ownership & competitiveness


Impact on company performance – 1

Employee ownership improves company performance relative to pre-employee ownership performance

Difference in Post‑ESOP to Pre‑ESOP Performance (2000)• Annual sales growth +2.4%• Annual employment growth +2.3%Difference between ESOP and non-ESOP productivity• Productivity edge of ESOP firms +6.2%

Source: Douglas Kruse and Joseph Blasi, Rutgers University



-6

-4

-2

0

2

4

6

8

Participatory EO Non Participatory EO

Relative Growth

Employee ownership + employee participation makes the difference

Sales growth of participatory employee-owned firms rose 7.2% faster than that of their competitors. Sales growth of non-participatory employee-owned firms lagged that of their competitors by 4.3%. Baseline (0.0%) equals sales growth of competitors.

Source: Jim Keogh and Peter Kardas, Washington State study



Organizational development and change in profits relative to industry

3

24 2330

48

0

10

20

30

40

50

60

No change(N=29)

Added 1(N=42)

Added 2(N=31)

Added 3(N=20)

Added 4 or 5(N=25)

Better than industry

(per

cen

t of

fi

rms)

Increasing avenues for participation correlates with increased profits


Impact on on job retention & creation

0 10 20 30 40 50 60

Worse than industry - 1%

Same as industry - 48%

Better than industry - 51%

How Ohio ESOPs compared with their industriesin job creation and retention


Increasing employee influenceSource: Ohio study

Percent using technique

before ESOP

Percent using technique

after the ESOP

Suggestion system 53% 67%

Problem solving teams 25% 52%

Self-managing work groups 14% 26%

Non-managerial employees on Board of Directors

0 17%


Impact of increasing employee influence

20 1823

4439

36

0

10

20

30

40

50

Profits Better Positive QuantitativeImpact

Positive QualitativeImpact

No NM on Board NM on Board

(per

cen

t of

fi

rms)

Non-managerial (NM) directors and firm performance


III. Employee ownership & inclusion


Impact on total employee compensation1999 comparison of wages and benefits in matched ESOP and non-ESOP companies

ESOP non-ESOP

Average wage: $19.09 $17.00

Median wage: $14.72 $13.58

Average retirement assets

ESOP $24,260 0

other plans 7,953 $12,735

Total retirement assets $32,213 $12,735

Source: Peter Kardas, Adria Scharf, and Jim Keogh, 1999 Washington State study


Impact on creation of wealth

Ohio wealth creation through ESOPs

1993 2001

Average equity per employee owner $24,500 $68,000

without 3 top outliers $19,060 $40,000

Source: IRS Form 5500 filings, Larkspur Data Resources


Cost effectiveness of employee-ownership support agencies

• Over the last 10 years, the rate of ESOP growth in Ohio has been more than twice that of the US as a whole

• Ohio employee-owned sector also appears to be more democratic and more participatory

• Why? Role of Ohio Employee Ownership Center


Impact indicators for OEOC, 1987-2004

• Worked with 485 companies employing 93,000 to explore employee ownership

• Assisted employees in buying part or all of 71 companies, creating 14,000 new employee owners

• Cost in state funds per job retained or stabilized has been about $250/job

• These companies created $300 million in equity for employee owners by 2001

• We estimate that this employee equity position grows by $20 million annually despite retirees taking out about $10 million annually


IV. Employee Ownership and the Community


Impact on community life

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

C1

C3

C5

E2

E4

E6

H2

SE2

SP

Co-operative town worse

Co-operative town better

The graph above shows standardized differences on the following measures: Crime: victimization (C1), policing (C2), confidence (C3), feeling of security (C4), do-mestic violence (C5) Education: level attained (E1), age leaving school (E2), truancy (E3), expected truancy (E4), post-school training (E5), perceived importance of education (E6) Health: physical health (H1), emotional health (H2) Social Environment: perceived gap between rich and poor (SE1), helpfulness of authori-ties (SE2), supportiveness of social networks (SE3) Social Participation: membership of clubs (SP)

Comparison of two Italian communities in Emilia Romagna

Source: David Erdal, 1999


Employee ownership and community economics

Impact on local economy• Anchors capital locally• Increases rate of reinvestment• Higher local multiplier effect

Impact on families• Increases job security• Builds family assets

Impact on community• Stabilizes tax base and community economics


Employee ownership and the employee owner

Employee ownership provides an additional pension & financial return

Participatory employee ownership also provides

• greater job-level influence

• some additional opportunities for training

• more insight into the business

• profit sharing in good times

• more job security in bad times


Community competitiveness

Sustainable community economies rest on• Competitive firms• Good wages and benefits• Anchored capital and jobs• Broad ownership of productive assets & asset

creation• High local multipliersRemember: There is no productivity in an

unemployment line

1 Employee Ownership & Economic Sustainability Competitiveness, Inclusion, and Wealth Creation John Logue Professor, Kent State University Director, Ohio.

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