Some simple requirements could ensure that employee-owned firms seeking certification are controlled by people of color
by Tonya Price and Lydia Edwards; edited by Jason Wiener
A recent post at Employee Ownership News, authored by Michael Keeling, discussed how minority-owned businesses often reject employee ownership because of fears of losing their minority-owned business certification. Here, lawyers from Jason Wiener | p.c. propose solutions.
The National Minority Supplier Development Council (NMSDC)—the organization that certifies minority-owned businesses—is a natural partner for the ongoing effort to support employee ownership. Its core mission is an “unwavering commitment to advance Asian, Black, Hispanic and Native American suppliers in a globalized corporate supply chain.”
This steadfast commitment could be enhanced by opening what’s known as Minority Business Entity (“MBE”) certification to all forms of minority-owned businesses, including those that are employee owned. Employee-owned firms, and cooperatives especially, have a strong and rich history in communities of color. As Dr. Jessica Gordon Nembhard has noted, “African Americans as well as other people of color and low-income people, have benefited greatly from cooperative ownership and democratic economic participation throughout the history of the United States.”
Combining MBE certification with employee ownership has the power to preserve jobs and provide real and meaningful ownership to people of color nationwide.
Notably, about a third of businesses owned by Asian, Black, Hispanic, and Native American (referred to as minority group members by the NMSDC) entrepreneurs lack a succession plan. As discussed in these pages, the impending wave of baby boomer retirees (aka, the Silver Tsunami)—some of whom own these businesses lacking succession plans—could, if their businesses close, result in unprecedented economic and cultural losses in communities nationwide. Employee ownership— i.e., conversion to either an Employee Stock Ownership Plan (ESOP) or worker cooperative—offers a pragmatic solution that research has shown to offer multiple benefits: employee-owned companies are high performing, pay above average wages, and are resilient in times of economic uncertainty.
So why isn’t everyone doing this? The lack of clarity around maintaining MBE certification is a significant bump in the road. For businesses that are not viable without MBE certification, this uncertainty can become a central factor in whether a retiring business owner will convert to an employee-owned company. Unlike the Women’s Business Enterprise National Council (WBENC), which provides for woman-owned certification of ESOPs and has indicated, in conversations with us in one region, a willingness to certify worker cooperatives, the NMSDC does not permit MBE certification of ESOPs and its position on worker cooperatives is not clear.
The financial and institutional support for employee ownership is growing. The NMSDC’s support would add significant momentum to ensure access to the full benefits of employee ownership for communities of color. To incorporate employee ownership into its certification standards, the NMSDC could consider the following approaches:
ESOP Certification
The likely sticking point for the NMSDC with regard to ESOPs is the lack of direct ownership as well as employee-owners’ inability to elect the board of directors (some ESOPs grant pass-through voting rights to employee-owners). ESOP employee-owners enjoy the economic benefits of ownership via their beneficial ownership of a trust that owns the company’s shares, but these employee-owners generally do not have the same voting rights afforded to traditional shareholders.
The NMSDC is rightly concerned with the composition of the board and who holds the decision-making power in the business, but those concerns can be addressed in ways other than direct voting. For example, the WBENC permits certification of ESOPs if, in addition to a woman holding the highest position in the company and the board being controlled by women, 51 percent of the beneficial owners are women and the ESOP trustee is a woman or a financial institution.
The NMSDC could adopt additional requirements for ESOPs to ensure that companies are genuinely controlled by minority group members.
The NMSDC, like the WBENC, already requires companies seeking MBE certification to have a board that is controlled by minority group members and that minority group members control the day-to-day operations of the business. The NMSDC could, like the WBENC, adopt additional requirements for ESOPs to ensure that companies are genuinely controlled by minority group members. These requirements could include, among others, the following:
- The ESOP trustee is a minority group member,
- A majority of board members are both minority group members and employee-owners,
- Employee-owners elect the majority of the board, and/or
- The highest position in the company be held by a minority group member.
Adopting one or more of these requirements ensures that the company is actually controlled by minority group members, effectively ensuring that use of an ESOP will further the NMSDC’s goals and align with its mission.
Cooperative Certification
As written, the NMSDC’s certification requirements are silent on worker cooperatives, but it is possible for a worker cooperative to comply with the existing certification requirements without modification. In worker cooperatives, employee-owners have direct ownership and full voting rights—including the right to elect the board of directors. Consequently, if 51 percent of the employees are minority group members, and the worker cooperative can demonstrate that the day-to-day operations are controlled by minority group members, the business would qualify for MBE certification.
In our work with technical assistance providers and clients, we have noted that despite the logical compatibility, companies are hesitant to convert to a worker cooperative without direct assurance from the NMSDC that cooperatives can be certified. Worker cooperatives are a natural fit for MBE certification and simply require an explicit stamp of approval from the NMSDC. As with providing a pathway for certification of ESOPs, we believe that the NMSDC’s express recognition of the cooperative structure could result in more cooperative conversions, greater wealth building opportunities for people of color, and a more diverse and equitable business landscape nationally.
A Powerful Way to Expand Ownership for People of Color
Today, the NMSDC serves as one of the largest gatekeepers for MBE certification and a key driver of the very real impact MBE certification creates for communities of color. It is absolutely critical that MBE certification remains rigorous and authentic, but it is also critical to preserve diverse ownership of companies built by the baby boomer generation—especially boomers of color—and to do so in a way that builds on and expands the economic opportunities those businesses have created.
These two goals are complementary and not exclusive. Combining MBE certification with employee ownership has the power to preserve jobs and provide real and meaningful ownership to people of color nationwide. The NMSDC’s inclusion of employee-owned companies in its certifying guidelines could be just the push a retiring owner needs to sell their company to the employees instead of selling off the assets or selling to a private equity firm, both options that are detrimental to employees, deleterious to minority ownership overall, and harmful to communities.
Attorneys Jason Weiner, Lydia Edwards and Tonya Price practice law at Jason Wiener | p.c., where they provide legal and business consulting services to entrepreneurs building social mission enterprises. Their services include assisting companies that wish to democratize ownership and governance structures. For more information, contact info@jrwiener.com.
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