Investor guidelines for shared value creation in employee ownership transitions unveiled
In mid-January, the Rutgers Institute for the Study of Employee Ownership and Profit Sharing held its mid-year Kelso fellows meeting, in which scholars and practitioners spent two days sharing research and ideas to deepen understanding of the many forms of employee ownership. Among wide-ranging panel discussions, was a plenary panel featuring Fifty by Fifty co-founder and Rutgers research fellow Jessica Rose, along with Hillary Irby of Soros Fund Management, and Robin Varghese from Open Society Foundations. Rose, Irby, and Varghese worked together over the last year to develop guidelines for impact investors and other third parties interested in structuring employee ownership transitions.
Scaling Employee Ownership through Capital Investors
One of the big questions for the employee ownership field is, why has the number of U.S. employee-owned firms failed to grow significantly over the last couple of decades? In an upcoming paper from Fifty by Fifty, Rose and co-author Marjorie Kelly propose that the barrier to growth is a lack of agency: employees don’t have the knowledge, skills, or capital to pursue a buyout of their employer, and employers, knowing little about the benefits of selling to employees, are more likely to respond to an opportunity that knocks on their door, such as an offer from a private equity firm or a strategic buyer.
There is growing interest among impact investors in using employee ownership investments to address income and wealth inequality.
The Rutgers panel identified impact investors, who are looking for a worthy investment but also want their money to “do good” in the world, as well-positioned to compete with traditional private equity—i.e., impact investors could provide that proverbial knock and make available the capital that is needed for an employee buyout. Irby stressed that there is growing interest among impact investors in using employee ownership investments to address income and wealth inequality.
But what would prevent such an impact investor-sponsored deal from extracting too much wealth, and leaving workers with an over-leveraged company? The rules of the road, suggested Irby, need to be more clearly defined. The panel presented a set of guidelines for investors to ensure fair returns while maximizing worker benefits.
Said Ted Becker, who served as a discussant on the panel, and Erin Turley, his partner in McDermott, Will & Emery, “The work being done in connection with the Guidelines for Shared Value Creation in Employee Ownership Transitions has the potential to address core social challenges present in the 21st century while also serving as a mechanism for addressing the ever increasing wealth gap in the United States.
“It has the potential to revolutionize employee ownership in America, finally making employee ownership a viable and valuable means for transitioning ownership of privately held companies.”
Five Overarching Goals
The panelists laid out several dozen technical guidelines designed to make best practices easy and tangible. The guidelines are intended to support five overarching goals:
1. Design equitable deal structures
Balance interests between sellers, investors, and employees through fair price of enterprise. Target a reasonable market-rate return for risk and duration of investment. Protect employees from financial abuses. Limit over-leverage and investment risk to reinforce long-term financial sustainability. Structure the deal to support employee ownership for as long as it serves the interests of the employee-owners.
2. Ensure broad-based ownership & participation
Create substantial employee ownership that reaches broadly and fairly into a company, beyond top managers and executives. Embed structures that ensure employees of all levels have voice and agency. Support employee access to key company data and financial information.
3. Promote quality jobs & working conditions
Ensure that jobs pay a living wage, include meaningful benefits, offer career-building opportunities, and provide safe, fair, dignified, and engaging workplaces.
4. Consider prioritizing impacted populations
Explore opportunities for employee ownership conversions to benefit low-wage workers, people of color, and disadvantaged communities.
5. Measure and report on employee impact
Implement metrics to measure outcomes for employees, alongside company and investor performance. Require periodic reporting to key stakeholders on the results of these measurements. Align incentives accordingly.
It’s clear that capital is the missing agent; it’s absolutely necessary to take employee ownership to scale. But there is also a danger. Capital has its own logic; we will need strong guardrails.”–Melissa Hoover, executive director of the Democracy at Work Institute and panel discussant
The guidelines are organized by deal stage to make them intuitive for investors. They cover topics from deal sourcing and pipeline criteria to valuation and deal structuring to post-transaction operations. Of particular importance are paying attention to job quality and working conditions and measuring employee impact along with company and investor performance. Incentives for the taking-forward team must be aligned with outcomes that clearly benefit the workers, and leave, at exit, a thriving employee-owned firm.
More work to be done
Melissa Hoover, executive director of the Democracy at Work Institute, a panel discussant, says, “It’s clear that capital is the missing agent; it’s absolutely necessary to take employee ownership to scale. But there is also a danger. Capital has its own logic; we will need strong guardrails, and even then, it will be a challenge to hold investors to them once we move beyond the realm of philanthropic capital.”
This work is far from finished, and this being the first presentation of the guidelines, the panelists laid out some of the challenges in hitting the right balance of “social ambition and attracting investors.” In addition, the panelists sought to enlist workshop participants pilot testing the guidelines so that they can be further refined going forward. For more details, and information about next steps, contact Jessica Rose, at email@example.com.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.