If you are interested in this article and want to learn more about how to build a more democratic economy, you can access Steve’s webinar series on that topic here and sign up to be sent his Remix column biweekly. Join this community of practice today!
It should come as no surprise that business ownership is a primary method of wealth creation in the US and the world. It is business that brings capital, land, and labor together to produce the goods and services that we consume. The US has focused on individual business ownership, but there are also methods that enable those with limited access to capital to come together to spread the risk among more people and develop businesses that they own in common.
Nonprofits engaged in wealth building have often stressed individual home ownership. Certainly, owning a home can help families build wealth. Provided they don’t refinance—a big if—paying a mortgage month after month gradually builds equity in the home. This is sometimes referred to as the “forced savings” aspect of home ownership.
It’s also true, of course, that a family might benefit from rising land values. But that’s an iffy proposition. As Washington Post finance columnist Michelle Singletary notes, “You shouldn’t buy a home with the idea that it’s an investment. It’s your place to live. It’s a way to stabilize some of the costs of housing.” Singletary also notes that, historically, housing values—at least when one accounts for the cost of making regular mortgage payments, along with house repair and maintenance costs—have basically risen at the rate of inflation, far less than the rate of return for business investments. Some families, naturally, do far better. But the risks are not insignificant. Indeed, households of color lost more than a trillion dollars in housing wealth in the Great Recession.
Small business carries its own risks. Famously, according to the US Small Business Administration (SBA), only one in three individually owned businesses are still in operation ten years after their founding. One benefit of common ownership, however, is that those risks are broadly distributed among many owners. Three different strategies are reviewed below.
Nonprofit Social Enterprise
Social enterprise in the US is one approach in which a nonprofit invests directly in business development. The term “social enterprise” can be—and has been—deployed in many ways. Here, however, the concept is a nonprofit that uses business ownership as a strategy that not only raises revenue, but also, in doing so, advances mission-related benefits.
Social enterprise is both a new and old idea. Nearly everyone knows the names of some large nonprofit organizations that have long had business operations: Goodwill Industries, Salvation Army, the Girl Scouts, and the YMCA among them. And there are also thousands of nonprofit hospitals and universities. The phrase “social enterprise,” however, only entered common lexicon in the 1990s.
The fact that earned income—unlike much grant revenue—is typically unrestricted means that social enterprise can provide flexible funds that can help nonprofits to support their operations and be more sustainable. Another social enterprise benefit can be to convert program clients into active enterprise participants. When they are well managed, social enterprises can help break down nonprofit paternalism—the all-too-common nonprofit tendency to act “for” but not always “with” communities— by bringing staff and service recipients into more direct communication (since the service recipients are now also employees contributing to the sustainability of the nonprofit itself) and therefore more mutually supporting relationships.
For example, DC Central Kitchen, a 30-year-old nonprofit based in Washington DC, runs a business that caters food for schools and nonprofits. Its culinary job training and placement program, combined with its linked social enterprise business, has succeeded in reducing prison recidivism by an estimated 90 percent. In 2016, the organization reports a job placement rate of 88 percent for its 91 graduates, while business revenues totaled nearly $8 million. In terms of social expenditure savings, DC Central Kitchen estimates that in 2016 alone its social enterprise and training programs saved taxpayers over $2 million in reduced prison expenses.
Employee Stock Ownership Plan (ESOP) companies
Another approach to business development that uses common ownership is the Employee Stock Ownership Plan (ESOP). ESOPs are pension plans that invest in the stock of the company where a person is employed. (Typically, companies with ESOPs also have a separate 401(k) retirement plan for diversification and retirement security reasons). With their ESOP pensions, workers collectively own all or part of the company through a trust. Employees cash out within a few years of retiring or leaving the firm.
Sign up for our free newsletter
Subscribe to the NPQ newsletter to have our top stories delivered directly to your inbox.
The ESOP form of employee ownership was formed by investment banker Louis Kelso and first gained federal support in 1974. The model is rarely used for startups but, as NPQ has covered, is commonly used to transfer ownership of companies from exiting family business owners to their employees. In the ESOP model, employees do not hold shares directly; they are held through a trust, governed by the pension trustee. ESOPs are generally financed through the company borrowing on employees’ behalf, with the loan paid back over time from company profits.
In a provision added to the tax code in 1984, business owners who sell or transfer 30 percent or more of their stock to employees have the right to defer capital gains through a “1042 rollover” when they use proceeds from a company sale to purchase stock in some other US company. Capital gains tax is deferred until the replacement stock is sold.
According to the nonprofit National Center on Employee Ownership (NCEO), as of 2015—because of how the US Department of Labor makes Form 5500 pension data available, a three-year lag in the data is typical—more than 10.8 million Americans are employed by companies whose workers own all or part of the company through an employee stock ownership plan (as well as an additional 3.6 million people who remain plan members because of recent past employment). The value of these ownership shares is nothing to scoff at. NCEO estimates that total plan asset value as of 2015 is $1.3 trillion, or more than $90,000 per account owner.
Most companies in which workers own the business through an ESOP are small or medium in size, typically with 100 to 500 employees, but some are a good deal larger. The largest, Florida-based Publix supermarkets, has over 200,000 employee owners and earned revenues of $36.1 billion. Most ESOP firms are highly efficient and profitable. Douglas Kruse, and Joseph Blasi, two Rutgers economists, conducted a meta-study of 29 studies, all of which compared ESOP company performance against comparable non-ESOP companies. In testimony to Congress, Kruse noted that, “25 years of research shows that employee ownership often leads to higher-performing workplaces and better compensation and work lives for employees.” For years, the nonprofit Ohio Employee Ownership Center, based at Kent State University, worked to assist transitions of business where family business owners were retiring to employee ownership. Between 1987 and 2011, 92 businesses were converted, helping retain 15,000 jobs at a cost estimated at $772 per job. By comparison, the nonprofit Good Jobs First has determined the average cost of business attraction of a so-called megadeal at $658,000 per job.
Now, as a result of legislation passed by Congress last year that makes it easier to access bank lending to finance worker buyouts, an increased pace of conversions is anticipated. As Derrick Rhayn noted earlier this year in NPQ, “Through the new expanded SBA opportunities, businesses can utilize SBA 7(a) loans of up to $2 million, of which a maximum of $1.5 million is guaranteed, to facilitate the development of ESOPs. The amended lending process allows loans to be made to the sponsor of the ESOP, rather than requiring the loan to be made directly to the ESOP. This change specifically has the potential to catalyze ESOP development as it eliminates capital restrictions on SBA 7(a) loans, which now allow for transaction costs to be paid through SBA loans.” Rhayn highlights the role of the Pennsylvania Center for Employee Ownership (PACEO). In neighboring New York state, an economic development agency based in Plattsburgh has likely set up what it is calling the North Country Center for Businesses in Transition for similar reasons.
Cooperatives are a third common ownership tool for building wealth. A co-op can broadly be defined as any business that is governed on the principle of one member, one vote. Nationally, some of the biggest concentrations of co-ops are owned by their consumers, such as the 116.2 million people who have accounts at credit unions, the 42 million who get electricity from electric utility co-ops, and the 18 million member-owners of Recreational Equipment, Inc., (REI), an outdoor equipment retailer. There are also a wide range of producer co-ops (think Organic Valley, Land O’Lakes, or many other farm-related co-ops) and purchasing co-ops (such as Ace Hardware or True Value). All told, according to a 2009 University of Wisconsin study, co-ops operate at 73,000 places of business throughout the US, own $3 trillion in assets, employ 857,000 people, and generate over $500 billion in revenue for their member-owners.
Worker cooperatives are smaller than consumer, producer, and purchasing co-op segments, but are growing and provide a powerful way to build community wealth. Worker cooperatives share some features with ESOPs in that, like ESOPs, worker co-ops are employee owned. However, ESOPs and worker co-ops are structured very differently. An ESOP is a pension plan, in which a trustee operating in the beneficial interests of the employees exercises most governance rights; by contrast, employees in a worker cooperative have direct control.
In short, a worker cooperative is an employee-owned business where each worker gets an equal say. In small cooperatives, every worker might also be a board member. In larger cooperatives, workers typically elect board members from among themselves to oversee co-op-wide matters. Worker cooperatives first gained prominence in the United States in the 1880s as the Knights of Labor promoted direct worker ownership of businesses; however, as the Knights of Labor declined, so did worker co-op businesses. In recent years, there has been a resurgence of interest. Numbers remain modest, but they are rising at a rapid rate.
A 2017 report by the Democracy at Work Institute (DAWI), the nonprofit research arm of the U.S. Federation of Worker Cooperatives, found over 450 worker cooperatives with a total of 6,738 workers and an estimated $467 million in revenues. Although these numbers are small, the data do suggest that sector has doubled in under a decade. Eight years before, the Wisconsin survey cited above had estimated 2,340 workers in 223 worker cooperatives with $219 million in revenues. The DAWI report found major industry concentrations “in retail trade; professional scientific, and technical services; as well as administrative, support, waste management, and remediation services.” Cooperative Home Care Associates (CHCA) in the Bronx, the country’s largest worker cooperative, operates in the home health care industry and has over 1,000 employee-owners and generates over $50 million in annual revenue; the co-op is also unionized, with workers represented by the Service Employees International Union, local 1199, since 2004.
New York City, where CHCA is based, is also home to one of the most extensive initiatives to promote worker cooperative development as a strategy for wealth building in communities of color. Since 2014, the city has provided funding for nonprofit technical assistance designed to build new worker-owned businesses. Initially, city support was a modest $1.2 million. By fiscal year 2018, it had increased to $2.9 million. Backed by this support, the number of worker co-ops has more than doubled in the Big Apple from 21 in 2015 to 48 last year. Worker co-op businesses created 141 new jobs in New York City in fiscal year 2018 alone.
Nonprofit social enterprise, ESOPs, and cooperatives are hardly the entire picture of inclusive economic development, but they provide important pieces of the puzzle for an economic development strategy that fosters equity, rather than ever-mounting inequality. Their impact can be heightened if they form part of a broader ecosystem, many of the elements of which are laid out in a 2016 report cowritten by DAWI and Project Equity, an employee ownership technical assistance nonprofit. One central idea of this approach is to dedicate resources on “investing in one’s own” (or, more technically, engage in place-based investing) rather than focus on business attraction. It is a simple concept, albeit one that can be challenging to implement. It has the unique advantage, however, that what you build through your own efforts is far more likely to last than what you purchase on the open market.