Fifty by Fifty

A MOVEMENT FOR EMPLOYEE OWNERSHIP

Dick May and Chris Mackin: A $100 billion loan guarantee program for employee ownership would be transformational

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It is welcome news that the State Small Business Credit Initiative (SSBCI) component of the American Rescue Plan Act of 2021 will include provisions to expand employee ownership. Indications are that in addition to sharing information and technical assistance, this initiative will place the funding and credit enhancement capability of the federal government in the service of workers, enabling them to compete with other buyers to acquire a piece of the businesses where they work.  We applaud this effort, but we would urge policymakers to lift their sights higher. In order to make a dent in the concentration of wealth and power in our economy, we need to reach beyond the horizon of small businesses. These ideas also belong squarely in the middle market of our economy, a segment where ownership is increasingly dominated by a $3 trillion war chest controlled by private equity fund managers.

These ideas also belong squarely in the middle market of our economy, a segment where ownership is increasingly dominated by a $3 trillion war chest controlled by private equity fund managers.

A policy idea with a long history
Interestingly, whatever scale is finally adopted for SSBCI, there is a significant precedent for this general policy idea that reaches back almost 100 years to the Great Depression. The crisis back then focused on housing. Most workers rented their homes, and many were being evicted. We needed a different model for worker housing because a majority of workers didn’t qualify for a home mortgage. That political realization led to government-backed home mortgage programs, which opened up broad access to home ownership for working families.

This time around, it is dawning on our policymakers that rented workers, whose economic fortunes are restricted to wages, will not be able to save enough wealth to retire with dignity. They should own some part of their places of work as well. Federal policy that encourages sharing the wealth-making potential of ownership at the firm level can provide a stronger foundation for combatting both economic inequality and retirement insecurity for U.S. workers. In the words of Yale political scientist Jacob Hacker, it can do so in a “pre-distributive” rather than a redistributive fashion. That distinction, sharing wealth “as it is being made” rather than taxing it and then redistributing it after the fact, can help sell these ideas politically to a bipartisan audience.

Raise the cap to include middle market
The final regulatory language for SSBCI has not yet been issued. Following implementation recommendations from the House Financial Services Committee, support will likely be made available for advisory services and dissemination of information about alternative ownership structures. Regulators are also considering credit enhancement measures, which will be key to attracting the interest of business owners considering the sale of their companies to employees.

All these developments are welcome but there remains a structural problem of some consequence. The Main Street Employee Ownership Act of 2018 raised the profile of this issue and paved the way for these latest advances. One problematic feature of that law, however, was the $7 million cap on loan guarantees imposed in conformance with traditional Small Business Administration (SBA) limits. The proposed SSBCI program operates under more flexible Treasury Department regulations, and a $20 million guarantee limit presently under discussion is a definite improvement. Nonetheless, it still falls short of the credit needs that would move the middle market.

According to the National Center for the Middle Market, 200,000 privately held businesses in the United States have revenues between $10 million and $1 billion and collectively employ close to 50 million employees. Without raising the credit enhancement limits, SSBCI assistance would be meaningful for only the very smallest slice of this spectrum. It would leave out the lion’s share of the middle market where wealth in our economy is particularly concentrated.

Our professional focus has been primarily on these middle-market firms that are the primary targets of conventional private equity investing. We believe that these companies are crucial because their scale encourages high-quality employment opportunities, career ladders, and the potential for substantial wealth sharing for workers, including minority and female workers. In order to facilitate impact in this segment, we believe Treasury should cap loan guarantees at a minimum of $30 million per company consistent with the value of middle-market firms. Lower guarantee ceilings would not provide sufficient liquidity to sellers of these companies who might otherwise consider employee ownership. Middle-market sellers considering sales to their employees would be forced to sell incrementally or take back notes that would not be paid off for up to ten years, when private equity buyers waiting in the wings could offer them immediate and complete cash sales.

Larger middle-market firms are ripe for employee ownership because they have the human capital and financial strength to make successful transitions to employee ownership. They are sustainable businesses with experienced management teams as well as financial and operating controls to help assure consistent growth and compliance with regulatory and investor demands. A relatively new policy idea such as employee ownership looking for credibility should draw from this stronger segment of our economy to help prove its worth in smaller, higher-risk domains.

Think big: $100 Billion loan guarantee program
Because it is truly a new policy frontier, it is exciting to hear discussions of loan guarantee programs of any scale that could finance broad-based worker ownership transitions. SSBCI is truly a “foot in the door.” It should be expanded as we propose but should ultimately be complemented with a more targeted approach to the middle market. (See our earlier discussion of how an Employee Equity Loan Program at scale would operate.) 

Total financing authority for employee ownership transitions should not be limited to $10 billion, or even $30 billion. We believe a case can be made to raise these limits to the same $100 billion level presently enjoyed by the Export-Import Bank. Economic inequality is certainly a problem deserving of a substantive policy solution equal to, if not greater, than that needed to help companies export their products.

A federal loan guarantee program of $100 billion per year would permit policymakers to grasp how employee ownership could truly address the problem of economic inequality on a national level.

A federal loan guarantee program of $100 billion per year would permit policymakers to grasp how employee ownership could truly address the problem of economic inequality on a national level. Over a ten-year period, we estimate that the participation level of employee owners could more than double—from the current 10.6 million employees (which has taken 47 years to build) to 23.5 million, with each new employee owner accumulating an average retirement account of $240,000.  We know of no other government-supported program that has provided a comparable level of impact on the financial well-being of U.S. workers and their families.

A role for the Department of Commerce
Finally, there is a bureaucratic identity problem that the SSBCI proposals presently under consideration brings to the fore. A commonly accepted adage of contemporary governing is that “personnel is policy.” To that observation we would add that bureaucratic geography matters.

Employee ownership is an idea that is relevant across our economy, and programs to support it should not be captured by a single agency. It should be encouraged in its present regulatory home at the Department of Labor. It should also be encouraged at both the United States Department of Commerce, which could focus on middle-market companies, as well as through existing small business programs administered through both the SBA and — as is the case with the SSBCI — at the United States Treasury.

Richard C. May (dick.may@awcfund.com) is the founder of American Working Capital, LLC; Christopher Mackin (cm@ownershipassociates.com) is a Carey Fellow at the Rutgers School of Management and Labor Relations, and founder of Ownership Associates, Inc. They are co-authors, with Robert Hockett, of Encouraging Inclusive Growth: The Employee Equity Loan Act.

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