An interview with Christopher Mackin and Richard May
Following the release of their paper, “Encouraging Inclusive Growth: The Employee Equity Loan Act (EELA),” which is summarized in a separate post, we emailed Christopher Mackin and Richard May and asked them to further elucidate how the EELA could transform the employee ownership landscape. Below is an edited version of their responses. If you would like a copy of the full paper and do not subscribe to Challenge, please email Christopher Mackin at cm@ownershipassociates.com.
Fifty by Fifty: You’ve been developing this concept for some time. Why do you think a new federal loan guarantee program could be transformative for employee ownership in the US?
Chris Mackin and Dick May: Employee ownership has made great strides in the US, but with 7,000 ESOPs and about 450 cooperatives, it remains on the margins of the American economy. A major obstacle to growth of ESOPs has been access to equity or “equity-like” mezzanine financing. [Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lenders are paid.]
Sellers of scaled, successful businesses typically face a choice between selling quickly to a well-funded private equity fund ready to cut a check, or selling slowly, in stages, to an Employee Stock Ownership Trust. Both sales may fetch a similar market price, but many business owners are reluctant to take that slower road, even if their preference is to sell to employees. The slow road can take ten years or more, and often involves substantial seller financing that puts the seller at risk. An employee equity loan program, as we have proposed, would even the playing field by providing the means for the employees to offer an all cash buyout, equivalent in value, time and risk to a private equity offer.
An employee equity loan program would even the playing field by providing the means for the employees to offer an all cash buyout, equivalent in value, time and risk to a private equity offer
Why target the “middle market”? What makes these companies particularly ripe for employee ownership?
According to our research, the middle market consists of approximately 39,000 privately held firms with annual revenues of $50M to $1B. This niche employs over 24 million people, nearly one sixth of the United States labor force. These are firms of scale, each employing several hundred workers or more. They are ripe for employee ownership because they have the human capital and financial strength to make the transition. Additionally, these firms are owned by second- or third-generation leaders who have guided these firms through turbulent start-up times and are nearing retirement.
Apart from the economic impact of these firms in their communities, we believe it is wise that the employee ownership field ring up success stories of scale. There needs to be clear evidence shared with the financial world at large that these ideas are not simply boutique or restricted to small or challenged company circumstances. Employee ownership is ready to compete in any and all markets of the American economy.
How would the EELA ensure that funds were only used to support broad-based ownership? (For example, a loan wouldn’t go to a small group of managers who want to buy out the seller).
The terms of Employee Equity Loan Program (EELP) guarantee would make that quite specific. Regulations would specify that guarantees only apply to companies that make investments with the loan proceeds that result in offering shared ownership for what are classified by the federal government as “qualified” plans that extend to all employees who work a specified minimum of annual hours, say 1500 hours per year.
You say in the paper that the EELP would have benefits not just for sellers and buyers but for the U.S. government and its citizens. What makes this a win-win for everyone, regardless of whether we ever work for an employee-owned firm?
We have spoken about the multiplier effects of jobs and business that middle-market companies provide to their communities. From a citizen’s perspective and the federal government perspective, the record of loan guarantee programs in housing, agriculture, with large export-import businesses, and with the Small Business Administration is quite good. The federal government actually makes money on these loan programs because it borrows at close to zero percent and lends/guarantees at a higher rate. To secure these guarantees, companies would need to show basic strengths revealed through standard loan underwriting procedures.
Finally, while in-depth research on this question has yet to be undertaken, employees who eventually cash out of their ownership positions pay ordinary income taxes at a higher level than they would simply from wages, returning funds to both the communities they live in and to the federal government in the form of taxes that benefit all citizens.
There are differences between your approach and the ideas for a more democratic economy being put forward by Senator Sanders and Warren and by the Labour Party in the UK. Can you summarize those differences?
That would be the topic for a longer interview but suffice it to say that our approach presumes that a transfer of ownership to employees should be “paid for.” Sellers, be they founder shareholders or public shareholders, should, we believe, be compensated for the market value of their interests, if shares change hands. A redistribution by legislative fiat, as the Labour Party and the Sanders campaign have proposed, is simpler but it is the kind of idea that in the longer run contributes to cynicism and resentment because it is perceived to be an expropriation.
There is no mistaking our policy priorities here. We wish to promote the most inclusive form of employee ownership possible, but we prefer to pursue that goal through means that are more likely to last, if only because they are judged by parties across ideological divides as fair and equitable. Once employees are dominant shareholders, with voice in corporate governance, we have little doubt that these firms will outperform conventionally structured firms.
What are the next steps to move this proposal from idea to action? Are there next steps for advocates who want to move this forward?
At present, the EELP idea is bread on the water awaiting takers. California and New York State government planners have voiced an interest in this idea as well as the city governments of Oklahoma City and Tulsa, OK; Newark, NJ; and Chicago, IL. We have briefed senior Congressional staff, and have seen some interest from Democratic presidential candidates. We’ve also started conversations with EO trade groups.
To keep up with next steps, watch this site as well as Employee Owned America, edited by John Case, who reports regularly on these topics. Readers can also email us at dick.may@awcfund.com or cm@ownershipassociates.com.
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