Are the Barbarians at the Gate?

Part 3: Is this real employee ownership?

In this post, Marjorie Kelly and Karen Kahn conclude our discussion of Ownership Works and its impact on the movement for employee ownership. See Part 1, “Can private equity be trusted to prioritize worker benefit?” And Part 2, “If equity shares increase workers’ productivity, who benefits?”

Private equity funds generally sell their acquisitions in three to seven years. That means “worker ownership” is likely to be short lived, raising concerns about the use of the term “employee ownership” to describe this initiative.

Will Ownership Works—with its watered down, short-lived equity for workers—take money away from more authentic employee ownership projects?

“They won’t actually be creating an employee-owned company over the long term,” said Ian MacFarlane, president of EA Engineering, a 100 percent employee-owned firm. “They’re using that term ‘employee ownership’ incorrectly.”

Diane Ives, program officer at The Kendeda Fund, which has made large investments in growing employee ownership, described genuine employee ownership designed to close the wealth gap and strengthen communities as “firmly grounded in democratic decision making, building employee voice and agency, and promoting shared prosperity.”

The equity employees receive in the KKR model lacks real employee decision power, is short lived, and is far from the 100 percent ownership others have embraced.

We spoke with Jon Shell of Social Capital Partners, who partnered with a large Canadian pension fund to help finance the conversion of Taylor Guitars to 100 percent employee ownership. That deal was very different from KKR’s acquisition of Gibson Guitars, where KKR has given a small slice of equity to employees. This financial benefit is short-term, with no guarantees of ownership when KKR exits the firm.

By contrast, the sellers of Taylor Guitars “were focused on maintaining the company culture they’d created over decades and wanted their 1,400 employees to own all of the company,” Shell said. According to public statements by Kurt Listug, one of Taylor’s founders, selling to a private equity fund wasn’t something they were willing to entertain. “They told us that they felt an ESOP was the only path to ensure a strong long-term future for the company,” Shell said, adding that the company is exceeding all performance expectations since the transaction.

We worry that donors will be taken in by the heart-warming stories of workers who are thrilled to receive $25,000 or $35,000 in equity shares. In some cases, that equity could become an important wealth-building asset. But will Ownership Works—with its watered down, short-lived equity for workers—take attention and philanthropic funding away from more authentic employee ownership projects? Foundations have been rightly concerned that employee ownership has failed to scale quickly enough, but is this the right kind of scale, with the right mission? Does this model of worker “ownership” build worker voice? Is it creating an enduring democratic economy, or turbocharging capitalism with a new form of greenwashing?

The start of a conversation
Notably, despite its website saying, “We are Movement,” Ownership Works official communications “have to date made limited acknowledgement of the many people who have been working toward a vision of employee ownership that is more comprehensive and designed to fundamentally address the growing wealth gap,” says Lisa Richter of Avivar Capital, an investment advisor whose institutional clients are increasing their investments in worker-ownership strategies. She and others we spoke to emphasized the need for real and ongoing conversations between Ownership Works and the movement that existed long before private equity entered the field.

Many of those we spoke with urged Ownership Works to embrace the movement for a more democratic economy and center the needs of workers as they move forward.

Ownership Works “is not a comprehensive solution to the deep inequalities in our economy, though it is a door opening,” Andrea Armeni of Transform Finance told us. “It could be a conversation starter. If Ownership Works is willing to engage in conversations about who is creating the value and who should capture it, the initiative has an important opportunity to become more transformative in the future.”

One of Armeni’s concerns is how to protect workers from private equity’s worst extractive impulses. Ownership Works says it will be setting standards. But such standards already exist—in particular, the “Guidelines for Equitable Employee Ownership Transitions,” developed by The Democracy Collaborative, the Soros family office, and Open Society Foundations, in consultation with Armeni and dozens of other leaders in the field. Designed to become the standard for equitable employee ownership finance, these guidelines show in detail how financial deals that transfer ownership can optimize worker benefit, providing a strong foundation on which to build an ownership economy.

Many of those we spoke with urged Ownership Works to embrace the movement for a more democratic economy and center the needs of workers as they move forward. Ownership Works could, for example, encourage PE firms to provide onsite childcare or create a down payment fund so workers could buy homes or put real money behind racial equity initiatives, says Joseph Cureton from Obran Cooperative.

Another proposal is for PE funds to exit some firms to ESOP ownership, which may require a different form of finance; as Lisa Richter suggested, “Ownership Works could set up a guarantee pool and flexible revolving loan fund to help finance employee ownership transitions at firms that are not of the size for a private equity transaction. Such a fund could also finance emerging innovations—for example, the creation of employee-owned holding companies that acquire firms undergoing owner succession. They could prioritize such efforts by targeting companies whose workers experience significant wealth inequality, including urban and rural companies whose workers are people of color, women and/or veterans.”

Andrea Dehlendorf of United for Respect is an advisor to Ownership Works. Her organization has been a leader in holding private equity firms accountable for job losses they create. More than 60 percent of retail job losses have been at firms owned by private equity and hedge funds; speaking for millions of members, her organization’s website says, “We have watched corporate executives cut our pay, hours, and benefits, and still walk away with millions” in compensation as companies go bankrupt.

What would Dehlendorf like to see at Ownership Works? She told us she wants to raise the issue of job quality, emphasizing that equity doesn’t replace a fair wage. She wants to see meaningful, long-term employee ownership. And she wants to see worker voice in governance.

We at the Democracy Collaborative stand with Dehlendorf. The Ownership Works initiative could help to lift up employee ownership throughout the economy. But in order to do so, it must be the start of a conversation. We hope to be part of that conversation, along with many others in the field, sitting down together with Ownership Works.

Read our entire series on the impact of private equity on the employee ownership field, including more from Andrea Armeni, Andrea Dehlendorf, and Joseph Cureton.

Is Private Equity about to Co-opt Employee Ownership?

karenkahn33@outlook.com

May 18, 2022

What the launch of the nonprofit Ownership Works could mean to the employee ownership movement.

Continue Reading Is Private Equity about to Co-opt Employee Ownership?