America is in a financial market meltdown. It’s spilling over on Minnesota, and it means capital formation may be difficult for all business models and types of enterprise – here and everywhere. That makes it all the more timely to explore underutilized ways to raise capital and draw on strengths of workers, be they basic laborers or professional experts.
Any Minnesota attempt to explore new tools for economic development should look at employee ownership as a viable option in some circumstance, and the people of Ohio already have good book on how to make it work.
Minnesota 2020 discussed a couple of new options for spurring economic development in a report a week ago. Similar in concept to Minnesota’s 308B cooperative law and Vermont’s L2C low profit limited liability companies are the not-so-new but underutilized employee ownership schemes that are especially popular in Ohio.
Ohio has hundreds of companies fully-owned or partly-owned by employees through employee stock option plans. Some family-owned enterprises here and across the nation have turned ownership of their firms over to employees through ESOP plans. While these successes should be applauded and supported, they remain few and far between in Minnesota.
On the other hand, Minnesota has a dozen or more companies that are clearly worker-owned and operated cooperatives. Troy Pieper, at the Hub Bike Co-op in Minneapolis, serves on the board of the U.S. Federation of Worker Cooperatives and works with groups in the Upper Midwest states to form worker-owned enterprises.
These enterprises can be extremely basic, such as the Hard Times Café‚ and Seward Café, to professional services firms like 8 Point Productions and Ed Visions, to manufacturers even if a bit eclectic, such as Northland Poster Collective.
So far, ESOPs appear to work best for large companies with high capital costs and dozens, if not hundreds or thousands of employees. They are usually a closely-held stock corporation even when they do operate cooperatively as a member organization. Worker co-ops, meanwhile, use various legal schemes for incorporation even though they adhere to cooperative principals (Rochdale Principles) and international cooperative standards (the Oslo Declaration).
Regardless of the legal structure chosen, Ohio points to employee ownership as a key to industrial stability and sustainability.
For those reasons, Indiana is now trying to duplicate Ohio’s successes with programs to help closely-held companies turn over ownership to employees. The Indiana State Treasurer explained that state’s thinking well: “No group of employee-owners has ever, ever, ever, ever” moved a plant to Mexico or China. That goes to the heart of community economic development and retention.
Two historical developments help make Ohio special. Consumer product giant Procter & Gamble has been employee owned since 1890 and now has about 45,000 employees participating in the enterprise that produces more than $40 billion in annual sales. The other fortuitous development is intellectual support.
Political science professor John Logue began exploring employee ownership schemes in the 1970s when Ohio was losing steel mills. He started the Ohio Employee Ownership Center in 1987 at Kent State University. It works with companies throughout the state much like Extension Service programs through land grant universities in other states.
Kent State’s OEOC has worked with 566 Ohio companies and retiring owners in the past 20 years. A minority of those firms was successfully converted to ESOP ownership. A survey of 118 such companies, however, found that better than 80 percent were equal to or superior to competitive industry peers in profitability, rate of capital investment and growth in employment – important factors for all local and regional economic planners.
At the same time, different states and nations have different regulations on how ESOPs and worker-owned enterprises are structured and governed. One Indian study found less than satisfactory results from ESOP enterprises in that country, while some American studies find ESOP companies generally outperforming peers and find employee performance closely linked to ownership stakes.
Three Auburn University business professors (Pugh, Oswald and Jahera), meanwhile, find that partial ESOP ownership is becoming a popular takeover defense mechanism in a report that can be accessed from Wiley InterScience here. Such a strategy may help defend against a hostile takeover but doesn’t add to the long-term performance of the company.
Similarly, not all cooperatives are alike. By creating a hybrid enterprise with multiple shareholders that includes employees, you may create a hybrid class of what economists and business professors call “agency theory problems.” These are problems that will be examined at a later time. But in short, clashes do arise between shareholders and stakeholders within all corporate ownership structures, and between “agents” (managers) and “principals” (investor-owners) – usually over the use of capital. This applies to cooperatives and ESOP-controlled enterprises just as certainly as it does publicly-traded stock corporations.
The danger can be explained in simple terms. One set of investors, be they ESOPs or cooperatives, may have personal and social goals for entering an enterprise such as delivery of services, raising the value of area agricultural crops or securing jobs. Passive outside investors, however, look to maximize returns on investment over time.
Federal laws primarily regulate ESOPs. That might explain why so few states do much to encourage their formation and their acquisition of equity stakes in existing businesses. Minnesota should examine how state business information flows down to the local level and make sure ESOP information is available to employees and community leaders where plants and enterprises may be changing ownership. While doing so, the state policy makers should also look at how ESOP enterprises might work with 308B and L3C-type enterprises.
If laws need to be changed to make these tools more useful, change them. If existing laws interfere with employee-ownership development, repeal or tweak. And business schools in Minnesota, which seems to be one of the last growth professions in the state, should make sure that students learn about ESOPs, cooperatives and other employee-owned business models.