Jim Bonham: Enter the Dragon?

Jim Bonham is the president of The ESOP Association, a national trade association, educating and advocating for employee ownership with an emphasis on Employee Stock Ownership Plans (ESOPs). The following column appeared in the May edition of The ESOP Report, a membership publication. It is republished here with permission of The ESOP Association.

Earlier this month, to great fanfare, a new non-profit group calling itself “Ownership Works” was announced in the Wall Street Journal with the reported purpose of partnering with companies and investors to “provide all employees with the opportunity to build wealth at work.” The group is principally, if not entirely, funded by private equity firms and their stakeholders.

The organization is positioning itself as a matchmaker of sorts between businesses in need of capital and private equity investors willing to provide that capital. The consideration these “investors” get in return is currently lacking in transparency. All of this is being done under the friendly and publicly appealing shelter of “employee ownership.” If the warning lights on your dashboard are starting to flicker, you are not alone.

If the warning lights on your dashboard are starting to flicker, you are not alone.

Led by Pete Stavros, partner and co-head of the Americas Private Equity Platform at private equity giant Kohlberg Kravis Roberts & Co (KKR), the organization has yet to announce its governance structure, but has released a long list of banks, private equity firms, and hedge funds as its backers and investors. Stavros by all accounts is reportedly a genuine believer that sharing ownership with employees results in the production of greater value within a company.

Stavros has spoken eloquently in several virtual appearances over the last several years about his personal journey away from the Milton Friedman school of thinking, and toward an economic philosophy of shared business stakeholders. But to be clear, Stavros is an investor who has experienced the financial return of employee ownership and is working to quantify the Return on Investment (ROI) other investors can realize by distributing some form of “ownership” to company employees.

This is where things get murky. Stavros and his new venture have provided no transparency into their approach. And while there’s no reason to doubt the sincerity of Mr. Stavros’ views, we’ve seen the damage that can result from unscrupulous private equity firms and hedge funds in terms of jobs lost and savings wiped out.

Making modest investments to a non-profit in order to take shelter from the negative public sentiment resulting from the massive and growing wealth inequality in America is a cheap way to diffuse heat.

In America, ESOPs continue to represent the only significant and truly broad-based form of employee ownership in our economy. Other approaches where employees are given stock options or other incentives are merely benefits where employees with the means can invest their own money in their employer at somewhat discounted rates and only under certain conditions. Other rare examples of stock grants do, in fact, exist. However, they lie outside the regulatory protections provided to employee owners under ERISA [Employee Retirement Insurance Security Act].

Due to a lack of attention to regulatory clarity by the U.S. Department of Labor, ERISA enforcement actions have become the bane of existence for many ESOP companies and their founders. Yet ERISA is also the life spring that allows ESOPs to exist. We must never forget that it is a law designed to protect the very employees who own our ESOP companies. Coupled with tax incentives for ESOP formation and finance, the one-two punch of tax savings and employee retirement security is potent. But it is also understandably cumbersome.

I do not begrudge Mr. Stavros and his allies for recognizing the true additionality that employee ownership brings to the value of a company and their desire to realize greater investment returns. But, as an organization representing true employee owners and their Employee Stock Ownership Plans, it is incumbent upon us to ensure that our interests are not compromised by a lack of protection for employees under the investment experiments this group intends to conduct.

Employee Ownership as a concept is incredibly popular in the public arena and we would be naïve to think the investors in this new group do not recognize that fact. Private equity and hedge funds are holding tightly to their own carried interest tax benefits. Making modest investments to a non-profit in order to take shelter from the negative public sentiment resulting from the massive and growing wealth inequality in America is a cheap way to diffuse heat. It is also very dangerous for those already providing true employee ownership – with all of its legally mandated employee protections.

Before our community embraces this new venture, much greater transparency and additional details are needed, not just the slick marketing we’ve seen in the public domain so far. True ownership comes with real protections and rights guaranteed under the law. Before we welcome this possible dragon into our camp, let’s be sure it doesn’t consume all that has already been built.

Read our entire series on Ownership Works and the impact of private equity on the employee ownership field.