Guest Blog – Employee Ownership Outlook

Today we bring you a guest blog from Corey Rosen, cofounder and former executive director of the National Center for Employee Ownership. He is now focusing his employee ownership work through the Rosen Ownership Opportunity Fund. A bio can be found here.

With all the talk about Iowa’s ESOP initiative, we thought this would be an interesting discussion.

States and Employee Ownership

According to a 2011 study by GoodJobsFirst, states spend about $70 billion per year on economic development, largely through tax incentives to get companies to relocate to or expand in the states (Money for Something: Job Creation and Job Quality Standards in State Economic Development Subsidy Programs). Governing.com  reports that states distributed $1.8 billion in incentives and tax credits to the entertainment industry alone between 2006-2008.

By contrast, states spend perhaps two million dollars on encouraging companies to become employee owned, even though employee owned companies grow 2.5% per year faster than they would have without an ownership plan, distribute billions of dollars a year in ownership benefits to employees that they can then spend on the local economy, and, in many cases, provide a way for owners to transition ownership that does not mean the company will be moved out of state when someone else buys a company or when new buyers reduce or eliminate staff.

States are clearly missing a bet. Experience shows that extremely modest expenditures on promoting employee stock ownership plans can yield major gains in job retention and expansion. Currently, only Vermont, Ohio, and Indiana have such programs. That is why a new initiative in Iowa is so encouraging (and one that can be copied).

Local ESOP company leaders met with state economic development officials and mapped out ideas for encouraging employee ownership. On January 10, Governor Terry Branstad announced that promoting employee ownership would be one of his three top priorities. The proposal has broad bi-partisan support and is expected to pass.

Branstad’s plan has several key elements:

  • Business owners would not have to pay state capital gains taxes for sales to ESOPs. That is a significant 9% in Iowa.
  • The Economic Development Authority (EDA) also would offer technical assistance and legal advice to employee buyers and companies, including to help pay for feasibility assessments.
  • The EDA would also work to make people more aware of ESOPs and how they work.

Existing State Programs

Three states currently have active employee ownership programs. The oldest is the Ohio Employee Ownership Center, based at Kent State University. It was started by the late John Logue, a professor at Kent State, in 1987. It provides technical assistance, training, and outreach to business owners, employee groups, local governments and organizations, and existing employee owned companies. It holds a large annual conference, operates an active network of ESOP companies, publishes books and papers, and holds a very successful series of seminars on succession planning. It is funded primarily by the state, but also receives foundation money and money from operations.

The Vermont Employee Ownership Center was formed in 2001 and also “provides information and resources to owners interested in selling their business to their employees, employee groups interested in purchasing a business, and entrepreneurs who wish to start up a company with broadly shared ownership.” It is funded through government and foundation grants, and from contributions from individuals and businesses.

Both the Ohio and Vermont centers are non-profit organizations, not part of the state government.

In 2007, Indiana, State Treasurer Richard Murdock (now a Republican Senate candidate) created a $50 million linked deposit program in which the state links making deposits into banks that make loans to ESOPs. The loan rate for the linked deposit funds is the CD rate plus 3.25%, but not less than 4.25%. Several ESOPs have been formed using the program.

State Programs in the Past

The late 1980s and early 1990s were the heyday of state employee ownership programs. New York, Washington, Oregon, and Michigan all had programs similar to Ohio’s, albeit with fewer staff than the Ohio Center now does. Massachusetts had a smaller program. All focused on providing technical assistance (often by arranging it through providers linked to the organizations), seminars, and publications. There was typically very little funding for feasibility studies. All of these programs succumbed to state budget cuts in the 1990s.

An NCEO analysis of the Ohio, New York, and Washington programs found that they increased the number of new ESOPs by about 30% over what would have been expected. That was an impressive return on investment—these programs typically had significantly less than $1 million in funding. Simply making people more aware of ESOPs created more plans. Harder to measure is the impact the programs had on the quality of plans, but there is good anecdotal reason to believe that by providing opportunities to companies to learn from one another, the plans were more effective.

Moving Forward

The argument for these plans is persuasive. At a nominal cost, they can create many new employee owned companies, often saving jobs and generating new sources of community wealth. By contrast, research on the net job creation impact of tax incentives for economic development is at best mixed. There is no question that the cost per job is very high.

The Iowa experience suggests that simply bringing this idea up with local state officials (generally those in economic development) and state political leaders may be enough to get things moving.