ESOPs: Built to Last, No Matter the Election Results

By J. Michael Keeling, ESOP Association President

As I travel and visit with ESOP fans, I hear some concern that our longtime supporters in Congress are moving on, due to electoral defeat, retirement, or moving into new public offices outside of Congress. The fear is that legislative and regulatory support for ESOPs has been weakened, or at least is less certain.

There is no question that the defeat of ESOP advocates—such as former Representatives Erik Paulsen (R-MN) and Peter Roskam (R-IL), who served as senior members of the extremely important House tax committee—is not a welcome development for ESOPs.
The retirement of the Chair of the Senate tax committee, Senator Orrin Hatch (R-UT), and defeat of Senators Dean Heller (R-NV) and Claire McCaskill (D-MO) is not great news for ESOP support. Another concern: With Republicans now in the minority in the House, strong ESOP Champion Rep. Virginia Foxx (R-NC) no longer chairs the House committee that oversees the Department of Labor and how it regulates ESOPs.

The list could go on.

Do these changes in the Congress bode troublesome days for ESOPs?
I say “no.”

Why?
The past is prologue, even though it is not always perfectly repeated. And a look at our past shows that ESOPs have staying power and always attract new champions to replace those who have moved on.

In recent days, I have reviewed ESOP Association newsletter articles I have written going back to 1982. What did I see in these 37 years of articles?

I saw many super ESOP champions in the House who were defeated in their bids for re-election, or who sought offices outside of Congress, or who decided it was time to move on to a new chapter in their lives. I saw the same developments in the Senate.

And still ESOPs survived and thrived. For example, in the 1980s and 1990s, particularly in the House and sometimes because of Administration proposals, our community faced proposals that would have reduced or even eliminated laws that benefit ESOP creation and operations. These proposals were debated, and—thanks to the support of our ESOP advocates on the Hill—they were rejected.

Our community has thrived because of the help of the women and men who have served on Capitol Hill. And we have survived after they left Capitol Hill for other endeavors.
Some of the many ESOP Congressional advocates—from both chambers and both parties—who have helped ESOPs over the years include: Anthony (D), Pickle (D), Rangel (D), Nancy Johnson (R), Ramstad (R), Packwood (R), Snowe (R), Dole (R), Breaux (D), Binghaman (D), Landrew (D). The list could go on and on, including literally hundreds of former members of Congress and ESOP supporters from 1981 through 2018.
Why did these individuals support ESOPs? Was it because The ESOP Association paid super-duper lobbyists or DC swamp dwellers to “tell” them to support ESOPs? No, of course not.

The past is prologue, even though it is not always perfectly repeated. And a look at our past shows that ESOPs have staying power and always attract new champions to replace those who have moved on. -JMK

Was it because The ESOP Association PAC gave $500 to $10,000 per election cycle to the women and men in Congress who publicly supported positive ESOP law? Again, the answer is no.

It was because the leaders of ESOP companies asked their elected officials to visit their businesses so they could learn for themselves what being an ESOP means.
Over the years I have attended literally hundreds of fundraising events for ESOP advocates in Congress. More times than I can remember, they saw my name badge and recognized the name of The ESOP Association, and their faces brightened. “ESOPS are special!” they would tell me sincerely.

ESOPs thrive in the legislative arena because of you and your fellow ESOP participants—whether you are machine operators or CEOs—showing outsiders, such as members of Congress, what working in an ESOP company is like. The result is a palpable feeling, and it impresses Senators and Representatives more than anything we in Washington can do.
Members of Congress come and go. The ESOP spirit remains.

So memorable was the panic that set in among leaders of the ESOP world when the “Godfather of ESOP law,” the late Senator Russell Long (D-LA), announced he would retire at the end of 1986.

The women and men involved with The ESOP Association at that time were alarmed—to say the least—almost begging the Senator to stay. They feared that if their champion retired, all his good work on behalf of ESOPs would be undone.

Senator Long’s response was: “If ESOPs cannot survive when I am gone, they do not deserve to exist.”

And what happened? ESOPs not only survived, they actually gained additional favor in the law. Take note of the law that passed in the late 1990s that permitted S corporation ESOPs to exist and to avoid paying any Federal taxes.

We will miss our friends who are no longer in Congress. But as Russell Long knew, ESOPs will continue for the simple reason that they deserve to do so.

ESOPs Gain New Attention as a Wealth Distribution Mechanism

Two organizations with significant pull in the business world are focusing their attention on the benefits that ESOPs and employee ownership can bring to disadvantaged communities.

The Aspen Institute Economic Opportunities Program and the Rockefeller Foundation have been working jointly to explore and promote the use of ESOPs and employee ownership in Qualified Opportunity Zones. These 761 zones include distressed communities in all 50 states, the District of Columbia, and five U.S. territories.

These zones were created by the Tax Cuts and Jobs Act of 2017 to encourage investment in the communities that need them most. But, as the Aspen Institute and Rockefeller Foundation note in a recently released document, not all investments benefit a community equally. The groups agree that investments that result in local employees owning a share in the business are important and worthy of support.

“For the Opportunity Zone incentives to fulfill their potential for impact, it is essential that strategies that both encourage the development of high-quality jobs and offer working people a stake in the success of their local economy are supported,” the document states. “Employee share ownership is one such strategy.”

“It is essential that strategies that both encourage the development of high-quality jobs and offer working people a stake in the success of their local economy are supported. Employee share ownership is one such strategy.”

The groups have held joint meetings and facilitated discussions among experts, in an effort to find ways to encourage Opportunity Zone investments in employee owned businesses. After one such meeting, in New York, the group determined that regulatory or legislative changes might be needed to provide greater clarity for those considering investing in an ESOP in an Opportunity Zone.

The groups continue to explore creative options that might promote greater ESOP investments in these zones. Some of the ideas and questions raised so far include:

  • Can Opportunity Funds be used to finance the acquisition and improvement of land owned by retiring business owners who sell to their employees?
  • Can ESOPs be an inclusive and responsible way for investors to exit from their investments in Qualified Opportunity Zones at the end of the 10-year investment period?
  • Can the Opportunity Zone regulations be clarified to include the structured equity used by ESOP owned S corporations under the definition of “qualified opportunity zone stock”?

The work these groups have invested in this effort underscores the value ESOPs can offer as a means of equitable wealth distribution, including—and perhaps especially—for those most in need. We salute the work of these groups. We will provide additional updates as they become available, and encourage our members to read the full report and to stay up to date with the efforts of the Aspen Institute and the Rockefeller Foundation.

2018 Mid-Term Elections Update

A quick glance at the results of the mid-term elections might leave one feeling that the ESOP community will face challenging days ahead. Certainly the retirement and defeat of key ESOP advocates in Congress—primarily in the House, where tax laws originate—pose a challenge. But there is good news too.

The “Bad” News

First, let’s look at the more challenging news.

We will lose some crucial, long-time ESOP Advocates next year.

In particular, three key friends of the ESOP community—and influential members of the House tax committee—won’t be returning to Congress in 2019: Representatives Erik Paulsen (R-MN) and Peter Roskam of (R-IL) were defeated in their re-election bids. Rep. Dave Reichert of (R-WA) retired.

Another major loss: Representative Virginia Foxx (R-NC)—the Chair the House Committee with jurisdiction over the Department of Labor and a longtime supporter of ESOPs—will lose her influential post when the Democrats take control of the House in January.

On the key Senate tax committee that will be involved with ERISA law changes, three ESOP champions will not return: Senators Dean Heller (R-NV) and Claire McCaskill of (D-MI) were not re-elected; Sen. Orin Hatch (R-UT) will retire.

Sen. Hatch’s departure also will be felt on the Senate Committee that has jurisdiction over the Department of Labor.

On the more positive side, turnover in other key Senate committees was less pronounced than in the House.

Support Continues to Grow

While we will be bidding farewell to many elected officials who have supported ESOPs so well, we also are greeting a host of new supporters.

In 2018, 39 new ESOP supporters emerged: 30 in the House and 9 in the Senate. Of these new supporters, the vast majority (33) will return to Congress in 2019.

This year our ESOP advocates in Congress took several actions that provided a strong show of support for ESOPs.

In October, at the start of Employee Ownership Month, 27 influential members of the House of Representatives wrote a letter urging President Trump to rein in the DOL’s overzealous and unfair enforcement of regulations that apply to ESOP companies.

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In August, the Main Street Employee Ownership Act was signed into law. The measure is designed to makes it easier for small companies to make use of the Small Business Administration’s 7(a) program to finance their transition to become employee-owned businesses, such as ESOPs.

Moving Forward

The number of ESOP advocates gained in 2018 is a testament to you, our members. By visiting elected officials in Washington, and—more importantly–inviting them to visit you in their home districts, you provide an indelible, first-hand view into the world of employee ownership. That kind of experience turns doubters into believers, and believers into staunch supporters.

If we continue to show members of Congress what employee ownership looks like, our supporters on Capitol Hill will continue to grow—and they will continue to take on prominent positions in the key House and Senate committees.

The net result: Positive ESOPs laws will remain—and perhaps even expand—into 2019 and beyond but only with your continued efforts and outreach.

ESOP Companies Continue Long Streak of Outstanding Financial Performance

The results of this year’s Economic Performance Survey (EPS) show that, once again, companies belonging to The ESOP Association have experienced positive corporate performance.

Just as importantly, the EPS once again shows that when companies perform well, employee owners share in the rewards. And this year, new data reveal a new facet of how ESOP companies distribute those rewards.EPS Report Cover_Page_1

Employee Owners Share the Rewards

For the first time ever, this year’s survey included questions on pay increases. The results show that 75 percent of responding companies increased wages at or above the national average of 2.7 percent, and 29 percent increased wages by 4 percent or more.

Sharing the wealth with employee owners is a fundamental aspect of ESOPs and one that helps align the efforts of all employee owners with the performance of the company.

In addition, 55 percent of responding companies contributed to their ESOPs an amount equivalent to 11 percent or more of their employee owners’ pay—far surpassing the typical 401(k) match.

Sharing the wealth with employee owners is a fundamental aspect of ESOPs and one that helps align the efforts of all employee owners with the performance of the company.

Profits Rose More than Revenue

The engagement of employee owners may help to explain a noteworthy trend: Companies responding to our survey realize profits that grow more than revenue.

EPS Report proft revenue

Ever since we started asking for more detail on revenue and profits in 2016, ESOP companies have reported profit margins that rose higher than the highest increases in revenue. The only explanation we can find is that these companies excel at managing costs, which is consistent with businesses that engage their employees and seek better, more efficient ways to operate.

Not every employee can contribute to greater sales or revenue. But every employee—especially those engaged in the business and who stand to benefit from its improved performance—can help reduce waste and improve efficiency.

A History of Strong Performance

Since the EPS was launched in 2000, the majority of responding companies have reported increases in profits for every year but two (2002 and 2010), and increases in revenue for every year but one (2010).

The exceptions noted above reflect the nationwide economic downturns of the prior years (2001 and 2009). Even in those challenging economic times, 29 percent or more of ESOP companies responding to our survey reported that profits and/or revenue increased.

These results align with recent academic research that found employee-owned businesses surpass conventionally-owned companies at riding out tough economic times. (See How Did Employee Owned Firms Weather the Last Two Recessions? by professors Fidan Kurtulus and Douglas Kruse.)

Looking For Non-Gambling Fun in Vegas?

So, you’re coming to the 2018 Las Vegas Conference and Trade Show, but maybe gambling isn’t your thing. Las Vegas may be home to some of the biggest casinos and hotels in the world – but there are so many other things to do besides gambling. Check out some of our favorite places to visit and activities to do:

Have you heard of The Neon Museum?

Image result for neon museum

With more than 200 retro signs, like the signs from Binion’s Horseshoe, Caesars Palace, and Golden Nugget, we definitely recommend bringing a camera. Once you see all the colorful signs, you’ll want pictures!

Are you looking for something a bit more rugged?

Maybe the Las Vegas ATV Tours are for you!

Image result for las vegas atv

Only 15 minutes away from The Vegas Strip, you can hop on an all-terrain vehicle and explore the Nellis Dunes!

Perhaps you’re looking for a quirky photo opportunity…

Check out the Art Motel Las Vegas

Art Motel Las Vegas things to do in las vegas

Not many people know about this cool abandoned motel turned beautiful art collection. What used to be the Town Lodge Motel in Downtown Las Vegas has been converted into a space for artists to showcase their unique work. Everything from the exterior walls to the actual rooms have been turned into an urban art collection that features all the talent Las Vegas has to offer.

These are just a couple of our favorite Las Vegas activities!

For more great ideas check out this list from Thrillist.

See everyone in Vegas!

Meet the 2018 ESOP Company of the Year

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Ownership Culture Runs Deep at Gardener’s Supply Company

Employee ownership is deeply rooted in the culture at the 2018 ESOP Company of the Year, Burlington, VT-based Gardener’s Supply Company. “It is part of who we are… it’s our identity,” says the company’s Director of HR Christie Kane.

Even a brief look reveals how fully the employee owners—from top to bottom—and the company are committed to broad-based employee ownership. For example, Gardener’s offers seasonal employees the chance to participate in the ESOP after their second year with the company.

Brad Bolton, who is Material Handling Lead at Gardener’s Supply, got his start as one of those seasonal employees. Bolton could tell right away that Gardener’s had a special culture: He could see it in the way employees interacted with each other.

The inclusive and motivated behavior of his colleagues spurred Bolton to become one of them, so he applied for a full time position. His understanding of and appreciation for the concept of employee ownership really kicked into high gear once he “became fully immersed in the culture,” he says.

As Bolton began to grasp that the roots of Gardener’s culture lay in its approach to living employee ownership, he became more involved in spreading the word.

Today, Bolton is the Chair of the Gardener’s Supply ESOP Committee, which itself is a prime example of the company’s cultural commitment. This 11-person group meets for an hour and a half every other week with the goal of “nurturing and sustaining the culture of employee ownership.”

Gardener’s investment in ownership reaches from its ESOP committee all the way to the top of the organization: The committee has an advisory board member who serves as the group’s liaison to the board of directors. This ensures that employee owner interests are included in planning discussions.

Including an advisory board member on an ESOP committee is fairly unique, and it is just one of the ways that Gardener’s has committed itself to living its ownership culture. The company has been an ESOP since 1987, and has invested years in refining its approach for educating employee owners and fine-tuning its interactive culture.
Examples of other approaches that have worked for Gardener’s include:

  • A Brownie for Your Thoughts. Each year, Gardener’s employee owners are personally invited to offer their ideas, questions, and concerns—in return for a fresh baked brownie. The questions are addressed and the answers are shared with the entire staff. For Gardener’s, this has been an effective way to open a line of communication with employee owners who might not otherwise feel comfortable asking questions about the organization.
  • Solstice Celebration. The anniversary of Gardener’s transition to 100 percent employee ownership falls on the winter solstice. Each year, employees remember the day by gathering to celebrate. Gardener’s includes customers in the experience: Its retail stores serve desserts to customers as a way of symbolically sharing a “piece of the pie.” This event helps open a dialogue between Gardener’s employee owners and the community they serve. This kind of interaction can help employee owners better understand customers’ needs and can help customers gain an appreciation for the passion and dedication of Gardener’s employee owners.

Pride in the company’s culture, and in the employee owners who embody that culture, is clearly something worth sharing.


“This kind of interaction can help employee owners better understand
customers’ needs and can help customers gain an appreciation for
the passion and dedication of Gardener’s employee owners.”


“We get a direct benefit for caring and doing our best, and it shows in our workforce,” says Cindy Turcot, Gardener’s President. “We have great employees, low turnover, and employees who offer ideas, constructive criticism, and solutions.”

At Gardener’s, the time invested in developing a home-grown culture of ownership and engagement certainly has paid off.

 

New Notions of Ownership

Not long ago, the main appeal for owning something was a combination of freedom and control.

Owning a car meant you had the freedom to travel wherever the road took you. (And some places where the road didn’t even exist.) It also meant a level of control over how and when you traveled, and how you treated your car. (By comparison, try painting your rental car metallic umber or replacing the steering wheel with a fuzzy one and see how far you get.)

Owning a home meant greater control over your monthly expenses, since you were no longer at the mercy of a landlord who could jack up your rent. It also meant the freedom in your “castle” to do as you pleased, when you pleased—including keeping strangers out of your home, if you wished.

These benefits of owning personal property, though, run counter to the reality of owning a business—as many employee owners can attest.

Owning a business means you take on responsibility for your product, your customers, your brand—everything. And that responsibility never takes a vacation. That doesn’t exactly mesh with the idea of driving your car off whenever you please, the breeze blowing through your hair, does it?

This disconnect between the ownership of personal property and business property often causes people to stumble when they first learn of employee ownership. They expect employee owners to have the freedom to do what they want, and to control day-to-day aspects of the business. But that is not how most employee owned businesses operate.

As a result, when some people are introduced to employee ownership, their outsized expectations can lead to crushing disappointment. As many in the ESOP community have noted, this disconnect is a fundamental challenge to explaining and expanding employee ownership.

But concepts of ownership are shifting, which may provide a new opportunity to help spread the word on ESOPs and shared capital more easily.

Today, people are far more willing to let strangers drive their cars and live in their homes—for a limited time, and for a fee. The notions of freedom and control are no longer absolute; owners of personal property are now willing to forego both freedom and control. In return, they are tapping the unused capital in their cars and homes.

In short, they are treating their personal property like business property—like something that should provide a return on investment.

There are parallels here to owners who share with employees the capital locked in their businesses. Like those who rent their homes and cars, these business owners are tapping their capital to get tangible returns. Those returns include greater participation from employee owners, who respond by investing more of themselves in the company.

These parallels are not perfect, but they don’t need to be. It is enough to note that the longstanding, fundamental, and emotional connections we have regarding ownership are starting to shift, and in ways that may make it easier for a larger audience to grasp the notion of shared capitalism.

Perhaps we are seeing the beginning of a new period, in which it gets just a little easier to have conversations about ESOPs and employee ownership. That would be a great thing—and a great thought on which to begin this year’s celebration of Employee Ownership Month.

The Five W’s of the EPS

survey

What is the EPS?

The Economic Performance Survey (EPS) gathers information about the performance of our corporate members. The results are shared with members of the media, policy leaders, and our members.

The EPS is sponsored each year by the Employee Ownership Foundation, which is dedicated to researching ESOPs and employee ownership.

The Foundation sponsors a variety of efforts, including the Kelso Fellowships, which conduct academic research on employee ownership and are administered by Rutgers University.

Who can take the survey?

Any Corporate Member of The ESOP Association can take the survey.

Where should I look for the survey?

On September 5, an e-mail with a link to the survey will be sent to the primary contact for each of our Corporate Members. (If you do not receive the e-mail, please check your e-mail system’s spam filter.)

The primary contact for your organization is the person who receives invoices and other communication from The ESOP Association.

When will the survey start and end?

The EPS will remain open from September 5, 2018 to September 21, 2018.

Why should I participate?

  1. The survey takes only two minutes to complete. (Seriously.)
  2. The survey results fuel content that will be shared during Employee Ownership Month and throughout the year. These historically positive figures help raise the profile of employee owned companies to the media, the public, thought leaders, and policy makers.
  3. The more responses we receive, the more statistically significant the results will be. Help the ESOP community thrive by taking part in the survey!
  4. Be a part of a historical survey. Now in its 27th year.

For more information, visit our website here.

 

Advocacy Update: Support for ESOPs Rises on Capitol Hill

You can never have too many friends in Congress. Politics is inherently changeable, and while it may seem that members of Congress have a job for life, in every session many are replaced—sometimes unexpectedly.

Some announce their retirement while others are defeated in primaries or elections. Some resign for health concerns and some leave for other factors entirely. Whatever the reason, a significant number of elected officials don’t return the following session.

(Has one of your representatives retired this year? See the Atlantic’s up-to-date retirement tracker for the latest word.)

Congressional turnover matters to us. We must constantly add new supporters to make up for the ones we will lose.

The good news for our community is that we continue to garner new support on Capitol Hill. The better news is that we continue to gain supporters from members on both sides of the aisle.

Since this session started on January 3, 2018, 32 members of Congress have become first-time supporters of the ESOP model. This support is bipartisan and bicameral. The group breaks down in this way (as of July 31):

  • 23 members (five percent) of the House
  • 9 members (nine percent) of the Senate
  • 16 Republicans
  • 16 Democrats

The percentage of new supporters in the Senate is particularly noteworthy. Another fact that illustrates our support in the Senate: In 14 states, both senators support pro-ESOP legislation.

In another five states, both senators have supported ESOPs in the past, but one or both have yet to support ESOPs this session. Those states are: Arkansas, Indiana, Kentucky, Louisiana, and North Carolina.

If you live in one of these states, please consider inviting these Senators to visit your company—perhaps during October, which is Employee Ownership Month. These Senators have supported us before, and likely will respond positively to a request for renewed support today.

To date, we have support from approximately 40 percent of the members of Congress. This is a huge success and testament to the important role ESOPs play in communities across the country.

Below is the list of the 32 House and Senate members who have joined the ranks of ESOP supporters this session. (The most recent supporters are at the end of the list.) If these individuals represent you in Congress, please consider thanking them for the support:

2017-2018 New ESOP Advocates

  1. Roger Marshall (R-KS)
  2. David Young (R-IA)
  3. Lou Barletta (R-PA)
  4. Brian Fitzpatrick (R-PA)
  5. Brian Higgins (D-NY)
  6. Jackie Walorski (R-IN)
  7. Derek Kilmer(D-WA)
  8. Josh Gottheimer (D-NJ)
  9. Don Bacon (R-NE)
  10. Deb Fischer (R-NE)
  11. Ruben Gallego (D-AZ)
  12. Scott Des-Jarlais (R-TN)
  13. Christopher Coons (D-DE)
  14. Joe Donnelly (D-IN)
  15. Patty Murray (D-WA)
  16. Ted Lieu (D-CA)
  17. Luis Correa (D-CA)
  18. Jim Banks (R-IN)
  19. Lloyd Smucker (R-PA)
  20. Dina Titus (D-NV)
  21. Mo Brooks (R-AL)
  22. Nydia Velazquez (D-NY)
  23. John Kennedy (R-LA)
  24. Cory Booker (D-NJ)
  25. John Ratcliffe (R-TX)
  26. Vela Filemon (D-TX)
  27. Bruce Poliquin (R-ME)
  28. Thom Tillis (R-NC)
  29. John Faso (R-NY)
  30. Michael Capuano (D-MA)
  31. Tammy Duckworth (D-IL)
  32. Chris Van Hollen (D-MD)

On the Hook for Saving America’s Cod Industry

Why employee ownership was the right choice for America.

What do Independence Day, ESOPs, and fishing have in common? More than you might think.

During the Revolutionary War, the British attempted to wipe out America’s Cod fleet because it was a critical part of our economy and a source of able hands for America’s growing Navy. Those efforts left the industry crippled for years after the last musket was fired in Yorktown.

George Washington, John Adams, Thomas Jefferson, James Madison and Alexander Hamilton, founders of this nation, considered the idea of employee ownership to be the single best economic plan for the republic and thus recommended it for the Cod industry.

The idea was that, instead of the fleet owners reaping all the profits, the entire Cod community from fishermen to engineers and Cod drying operations shared in the success of the industry. The shared ownership inspired and motivated each individual to work harder and work together towards a common goal – ultimately saving the industry.

The Citizen’s Share, written by professors Joseph Blasi, Richard Freeman, and Douglas Kruse, traces the development of employee ownership throughout American history and explains how today’s economy can, and will, benefit from the basic principles of employee ownership and profit sharing. While the book starts with the founding fathers and the foundation of America it quickly gets into explaining why employee ownership is important in modern times.

Capture
The Citizen’s Share, by professors Joseph Blasi, Richard Freeman, and Douglas Kruse.

In one study, conducted in 2000, Blasi, Freeman, and Kruse found that ESOP firms had, “significantly higher sales growth and higher sales per worker” when compared to similar companies without ESOPs.

Today, almost 20 years later, ESOPs are well recognized as having almost exclusively positive effects on a company. Increased motivation, increased productivity, and improved morale and corporate culture are just the tip of the iceberg when it comes to the benefits of ESOPs. ESOP companies even outperformed their peers during the great recession!

Independence Day is a time to reflect on everything that makes this nation special. The ability for employees to own a part of the company they work for is a unique and important part of what makes this country successful.

So, at the end of the day, we must go back to the old adage, “If it ain’t broke don’t fix it.” Employee ownership has been working successfully in the US since the revolutionary war and is poised to continue to perform well today and tomorrow.