By Anthony Mathews
For the last several years, there has been a constant and very predictable discussion taking place regarding the sustainability of ESOP companies. Below the surface of the argument are really two fundamentally different questions: a) Is our company sustainable in the marketplace? And, b) Is it sustainable as an employee-owned venture? It is curious that the discussion takes such a fever pitch as the research is entirely compelling with regard to the first question.
Employee-ownership companies that combine broad-based ownership with a style of management that empower employees to contribute to the overall success are not only sustainable - they are superior. Recent research confirms what has been found for more than 30 years – that employee-ownership companies outperform otherwise equivalent, comparable companies. They grow faster; they are much less likely to go out of business; they are slower to lay-off employees when the economy slows and quicker to rehire when it improves; and they are making real contributions to the health of the communities in which they live. Employees of our companies are more loyal and satisfied, require less management, and can expect to retire with substantially more than they would have working in an identical company without employee ownership.
Given all of that, it seems clear that the real hand-wringing is focused on the second question, that is the question of the sustainability of employee ownership as a structure.
Most often, the hand-wringers will point to the ongoing repurchase obligations that ESOP ownership brings to the equation as the fundamental flaw in the structure. They will often characterize the benefit related stock repurchase as "buying the same stock over and over again." The implication is that this is a foolish use of corporate earnings that would stunt growth and eventually cause the company to fail – as one would expect any pyramid scheme to fail - as though this feature is created by and exclusive to the ESOP corporate model.
There is no doubt that that obligation is real and a significant planning obligation for any ESOP company. But, looked at from a broader perspective, the repurchase obligation is not actually an ESOP problem at all so much as it is a natural feature of closely held corporate ownership. After all, ESOPs in publicly traded companies have no repurchase liability, so it can't be the ESOP per se that causes the concern. This concern points to nothing more than the illiquidity that comes as part of the package accompanying all the upside potential for growth and wealth creation a closely held company offers as well. I remind my students all the time that the vast bulk of the wealth in our country was and continues to be built in closely held companies – not in the public markets; that diversification is one way to preserve wealth once you have built it, but it is a lousy way to create wealth in the first place.
For ESOP companies, federal law does require that shares be repurchased from employees when they leave the company (subject to very broad rules that allow for management of that obligation over an extended period after an employee leaves the company for whatever reasons). And, this does distinguish us from other closely held corporations. But, this requirement both creates an ongoing obligation and protects us from massive unplanned events that often cause illiquidity crises in other settings such as, divorce, shareholder disagreement, death of a founder, and so forth. In many of these settings, an ESOP becomes the answer to the problem.
So why does the question linger? I think, because in the end, we find that in spite of all the research that supports employee ownership as a marvelous way to run a business, experience also shows that it is extremely fragile and can be destroyed quickly by one inherent weakness. In the end, the only significant vulnerability of an employee ownership company is its own leadership.
Simply put, employee ownership is strong as long as the company's highest level leadership is committed to sustaining and supporting it. And as soon as that commitment wanes, employee ownership and everything that comes with it – culture, engagement, autonomy, wealth creation, loyalty, trust - can and will disappear in a flash.
In the end, the only way to protect and sustain employee ownership is by continuing to develop generations of leaders who believe in it and who are willing to do what it takes to keep it going. In many ways, the growth and development of employee-owned companies is the story of a succession of great leaders who, in many cases, put the best interest of all a notch above their own. We are grateful such people exist and we are gratified at the number of programs available around the country to help them refine their skills and shepherd this incredible idea into the 21st century as a major influence on the economic and social life of our country.