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The Big Benefits of Employee Ownership

Here is an excerpt from an article written by Thomas Dudley and for Harvard Business Review’s The Big Idea Series / Getting Serious About Stakeholder Capitalism and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

Credit:  Brian Stauffer

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Research shows employee ownership can reduce inequality and improve productivity.

For decades now, the wealth gap in the United States has been growing wider. The effects of this concentration of resources at the top can be felt throughout society, from slowed economic growth to the degradation of democracy itself. In the business world, the problems associated with wealth inequality are stark enough that companies increasingly feel compelled to act. More and more businesses are promising to look to the interests of stakeholders, not just shareholders, in an effort to play a healing role in society. The question for most is, How?

Business leaders have limited influence over potential policy solutions to inequality, such as tax increases. Still, they can have a direct, immediate, and targeted impact by giving employees ownership stakes in their companies.

Employee ownership isn’t a new idea, but it’s widely overlooked — surprisingly so, given how the model has been shown to benefit not just workers but also owners. According to numerous academic studies, companies where at least 30% of the shares are owned by a broad-based group of employees, where all employees have access to ownership, and where the concentration of ownership is limited are more productive, grow faster, and are less likely to go out of business than their counterparts. According to recent research by the National Center for Employee Ownership, employee-owners have higher wages and net worths, receive better benefits, and are less likely to lose jobs to cuts and outsourcing during a downturn, compared with workers who don’t have ownership stakes in their organizations.

The benefits of employee ownership are proven; unlike new policy proposals or novel ESG models, decades of evidence back them up. Companies looking to convert to employee ownership can find examples across industries, firm sizes and ages, and ownership stakes. If more organizations adopted even limited employee ownership, the results could be profound. In fact, according to our research, broad adoption of the 30% employee-owned model could create life-changing gains for marginalized populations.

Capital and Wealth Inequality

What’s so special about employee ownership? For one, it can accomplish something that many other inequality solutions struggle to: helping more people build wealth through the accumulation of assets. Business ownership is among the most concentrated forms of wealth in the U.S., with the richest 1% of Americans owning a majority of all business wealth, and the top 10% owning more than 90%. Meanwhile, households in the bottom 50% own an average of just $825 in private company stock and $522 in public company stock. The poorest half of the population accounts for around just 0.25% of all business ownership.

This concentration of ownership helps explain how wealth inequality in the United States has grown to levels that have rarely been seen in recorded history. The returns on the assets owned by the rich allow them to grow their wealth at rates that the majority of Americans cannot match when they are relying largely on wages.

Business ownership is among the most concentrated forms of wealth in the U.S.

Data from the Survey of Consumer Finances (SCF), a triennial survey of household wealth conducted by the Federal Reserve Board, shows that the rich’s largest asset is the ownership of businesses. According to the SCF, the richest 1% of Americans have an average of $28.4 million in assets, and $10.8 million of that is held in private companies. At least another $5.1 million, on average, is invested in shares of public companies. In total, business ownership tends to account for over 56% of the portfolio of the top 1% of households.

Given all this, it’s easy to see how wealth inequality is driven by the fact that most people are shut out of the ownership class. In 2019, the top 1% of the U.S. population controlled 35% of wealth, while the middle 40% of the population controlled just 28%, according to the World Inequality Database. In 1985, the year in which the wealth held by the middle 40% peaked, this group controlled 35% of the wealth, with the top 1% controlling only 24%. Without intervention, the rich will continue to get richer, and everyone else will be unable to keep up.

What 30% Employee Ownership Could Do

Knowing the significant role ownership stakes play in building wealth, we conducted an empirical thought experiment: What would happen if 30% of all businesses were owned by employees using an employee stock ownership plan (ESOP)?

To find out, we used the most recent SCF data to calculate how wealth inequality would change if the transfer in ownership was made overnight. This allowed us to see a snapshot of how significant the impact of ownership would be. We used 30% as the threshold for when a company can rightfully be called employee-owned, because it is the standard set by Certified Employee-Owned, the only national accreditation program for these kinds of companies. (One of us, Thomas, is its cofounder and CEO.) Additionally, this threshold is aligned with historical legislation to encourage employee ownership. For our model of ownership we used ESOP, an effective ownership structure established more than 40 years ago, because it’s the most common form of employee-owned company today.

We found that the benefits of widespread employee ownership are broad, with all wealth quantiles below 90% seeing an increase. Workers who have benefited least from the recent meteoric gains in the labor and stock markets would see dramatic changes: The share of wealth held by the bottom 50% of Americans would more than quadruple, jumping from just 1.4% of the total net worth of Americans to 6.4%. Median wealth among Black households would more than quadruple as well, from $24,000 to $106,000. Those without high school diplomas would see similar gains, with their median wealth increasing from $21,000 to $84,000.

The costs at the top would be negligible for all but the very richest. Those in the 90th to 99th percentiles of wealth would see an average decline of 1% of their net worth. It’s only the top 1% who would see any sort of substantial decline, with their net worth decreasing 14%.

While these numbers are dramatic, we also found that smaller changes would have a huge impact for tens of millions of Americans. Employee ownership is not an all-or-nothing proposition. If just 10% of every business was employee-owned, the wealth share of the bottom 50% would more than double, as would the median wealth of Black households.

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Here is a direct link to the complete article.t

Thomas Dudley is cofounder and CEO of Certified Employee-Owned.
Ethan Rouen is an assistant professor at Harvard Business School and the faculty cochair of the Impact-Weighted Accounts Project.

 

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