ESOPs: A Truly American Invention

The ESOP model we know is unique, and exists only in the United States. Perhaps that is no accident, since concepts that are intrinsic to employee ownership—such as economic fairness, and providing business opportunities for those who will work for them—have been evident in American economic thinking since before the Revolutionary War.

Here are some lessons from the nation’s early history that continue to relate to ESOPs and employee ownership today.

Broad Support

As professors Joseph Blasi and Douglas Kruse point out in The Citizen’s Share, one of the American government’s earliest legislative actions was providing a tax break to help rebuild New England’s cod fishing industry, which had been decimated by the Revolutionary War.

But, there was a catch: The federal assistance would be available only if employees shared in the profits.

Three Revolutionary leaders agreed on this financial assistance and the requirement that employees share in the benefits: George Washington, Thomas Jefferson, and Alexander Hamilton.

Jefferson and Hamilton were political adversaries who held very different views on the nation’s economy. Yet the fundamental concept of economic fairness—one central to the Revolution itself—was powerful enough to cause them to join forces.

That tradition continues today: Pro-ESOP legislation before Congress is sponsored by Democrats, Republicans, and Independents. And thought leaders representing the left, right, and center all have publicly stated their support for employee ownership and ESOPs.

Lending Capital

Where Washington, Hamilton, and Jefferson used the nation’s money to support employee ownership, Ben Franklin used his own.

Franklin was the elder statesmen among Revolutionary leaders, and by the time the war had started he had already launched and sold his successful printing business. But Franklin didn’t start out as a successful business leader. Like many young men of his day, Franklin learned his trade by serving as an apprentice—which was akin to signing an utterly lopsided non-compete agreement.

The apprentice learned his master’s trade, and was given food, lodging, and clothing. In exchange, though, he signed a contract pledging to keep his master’s trade secrets and to work for up to seven years without pay. The master could even control the apprentice’s non-work hours. For example, in one contract of the colonial era, the apprentice was not allowed to buy or sell goods without his master’s permission, and was not allowed to marry until the apprenticeship had ended.

Once an apprentice had served his term, he could work as a journeyman at any shop where he could land a job. But he still had an uphill battle to becoming an owner. A huge obstacle—then, as it is now—was a lack of capital. This was especially true for the printing business in Franklin’s day because the necessary printing equipment had to be imported from England.

Saving money on a journeyman’s salary could be challenging, but Franklin relied on his keen intellect, diligent work ethic, and frugal lifestyle to get ahead.

But even these were not enough: In the end, Franklin was able to open his own shop at an early age because others helped him obtain the seed money he needed.

As Franklin became more successful, he in turn helped his employees set up their own businesses. In 1733, he sent one of his journeyman employees to the city of Charleston, South Carolina, which needed a printer. Franklin paid the upfront capital costs for the business, buying the expensive press and type. He also paid one third of the expenses. He took one third of the profits for six years, at which point the journeyman could purchase the equipment and run his own business.

The first time he tried this arrangement, it did not start well. The employee he sent to Charleston was not a good accountant, making it difficult for Franklin to keep tabs on the business. When the employee died, his wife took over. She provided Franklin with accurate and timely payments and accounting, and managed the business successfully. At the end of the term, she purchased the printing house from Franklin and installed her son in the business.

Despite the early troubles with this first agreement, Franklin went on to establish his best workmen in similar arrangements. As with his first effort, he incurred the upfront costs and enabled his employees to operate the business, earn a share of the profits, and eventually own the operation. “Most of them did well,” he wrote in his autobiography, “being enabled at the end of our term, six years, to purchase the types of me and go on working for themselves.”

Franklin’s actions are clearly similar to those of current day owners who enable their employees to buy the business. As in Franklin’s day, most employees lack the resources to make the upfront investment in a business. Today’s owners who start a leveraged ESOP are following Franklin’s lead, providing the capital needed to help employees buy the business, and enabling them to pay off the loan through their future efforts.

Gradual Retirement

In yet another way, Franklin resembled an owner who sells to an ESOP.

At the age of 41, Franklin retired from the daily operations of his printing business and turned it over to his new partner, David Hall, who had been his employee for four years. For 18 years Hall ran the shop, earned a share of the profits, and gave Franklin his share. At the end of that time, Hall purchased the business outright, with the money he made running Franklin’s operation.

Like many modern-day owners, Franklin transitioned out of the business over time. Like many good ESOP companies, he had a succession plan in place. And, as he had done before, Franklin gave one of his employees—not an outsider—the chance to be a business owner.