Fifty by Fifty

A MOVEMENT FOR EMPLOYEE OWNERSHIP

Are the Barbarians at the Gate?   

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Part 1: Can private equity be trusted to prioritize worker benefit?

By Marjorie Kelly and Karen Kahn

As we reached out to the field to collect reactions to the launch of Ownership Works, we heard hopes and fears. Corey Rosen, founder of the National Center for Employee Ownership, expressed the upside of the new initiative in a recent blog post, writing that he views the project as “making a significant difference in the way employee ownership is viewed not only by private equity firms but other companies as well.” Rosen wasn’t alone; others expressed hope that with these large private equity firms touting the benefits of employee ownership, it would finally be accepted as a smart way to do business.

We heard deep skepticism and fear that this effort would co-opt and dilute employee ownership, crippling efforts to further a truly democratic economy.

But at the same time, we heard deep skepticism and fear that, rather than fully realizing employee ownership, this effort would co-opt and dilute employee ownership, crippling efforts to further a truly democratic economy that centers ownership along with worker autonomy, voice, and decision making.

Ian MacFarlane, president of EA Engineering—a firm with $140 million in revenue which is 100 percent employee-owned and a B Corporation—put it this way: “My gut reaction was negative.” He added, “It seems they’re doing what big capital does: take over a concept like employee ownership and make it their own in order to make more money.”

That doesn’t seem far from the truth, when you listen to cheerleaders such as John Danhakl, managing partner at Leonard Green & Partners. In a recent Milken Institute webinar, Danhakl explained that sharing equity with workers “helps us do our jobs better”—i.e., the returns are better.

He explained, “We found that returns for the investments where there is broader equity ownership tend to exceed those of more traditional constructs. To give an example, of the ten companies we have with the broadest equity ownership today, the returns for our limited partners has been in excess of four times the capital invested.” Compare that to the median return for the private equity asset class in September 2020, which according to the New York Times, was around 14 percent.  

Jim Bonham, president of the ESOP Association, is also concerned about cooptation. In a message to his membership entitled, “Enter the Dragon?” he writes, “Before we welcome this possible dragon into our camp, let’s be sure it doesn’t consume all that has already been built.”  

Bonham is particularly concerned about the lack of transparency regarding the Ownership Works equity model. He notes, these short-term equity grants will not take the form of ESOPs, in part because ESOPs are regulated in ways that would be incompatible with private equity. That regulatory framework can present difficulties, he acknowledges, but it is designed to protect workers. Thus far, he sees little in the Ownership Works model that offers that same protection. We’ve seen “the damage that can result from unscrupulous private equity firms in terms of jobs lost and savings wiped out,” he writes.

As PE firms cling to their “carried interest tax benefits,” Bonham wrote, he couldn’t help but question their sincerity. Trying to shelter from the “negative public sentiment” with modest investments in a nonprofit is “a cheap way to diffuse heat,” he wrote. And he added, it’s also “very dangerous for those already providing true employee ownership—with all of its legally mandated employee ownership protections.”

Read our entire series on the impact of private equity on the employee ownership field, including more from Ian MacFarlane and Jim Bonham.

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