Employee Ownership & Economic Sustainability Competitiveness, Inclusion, and Wealth Creation John Logue Professor, K

1. Employee Ownership & Economic Sustainability Competitiveness, Inclusion, and Wealth Creation John Logue Professor, Kent State University Director, Ohio Employee Ownership Center 113 McGilvrey Hall telephone: 330-672-3028 Kent State University fax: 330-672-4063 Kent, Ohio 44240 email: jlogue@kent.edu http://www.kent.edu/oeoc Prepared for the External Advisory Committee on Cities and Communities, Theme: Economic Sustainability Ottawa April 18-19, 2005 Ohio Employee Ownership Center

2. I. The Landscape of Employee Ownership in the US and Ohio Ohio Employee Ownership Center

3. Forms of employee ownership 1) Employee Stock Ownership Plans (ESOPs) Tax advantaged retirement plans for employees Invest primarily or exclusively in the stock of the employing company Can borrow money Must include at least 80% of permanent, full time employees (unless union opts out) Consequently ESOPs are excellent tools for employees to buy companiesand encourage broad ownership Ohio Employee Ownership Center

4. Forms of employee ownership (continued) 2) 401(k) savings plans holding company stock • Frequently used in public companies • The Enron problem 3) Broadly distributed stock options • Public companies: contingent compensation for employees rather than long term ownership • Closely held companies: Must be coupled with internal market Ohio Employee Ownership Center

5. Forms of employee ownership (continued) 4) Direct employee stock purchase plans • No tax advantages • Sense of direct ownership Some companies use ESOPs, options and direct purchase 5) Cooperatives • Fewer tax advantages • Fairly flexible • Most advantageous in smaller companies • “Born democratic” – members control the co-op Ohio Employee Ownership Center

6. The employee-owned sector in the US today Ohio Employee Ownership Center

7. Employee ownership in Ohio Context: Ohio is industrial state with population of 11.5 million and non-farm employment is 5.4 million – about a third the population and labor force of Canada Ohio Employee Ownership Center

8. Employee ownership in Ohio In Ohio there are about 425 partially or wholly employee-owned companies with about 410,000 employee owners • Median employment: 110-120 employees • Median sales: $15 million • Closely held: 85% • Majority employee owned: ca. 35% • Full corporate governance rights for employees: 42% • Non-managerial employees on board of directors: 17% • Automatic disclosure of financial information: 48% • If no automatic disclosure (i.e., other 52%), financials are available on request: 57% Ohio Employee Ownership Center

9. Growth of the Ohio Employee Owned Sector Source: IRS Form 5500 filings, Larkspur Data Resources Ohio Employee Ownership Center

10. Reasons for employee ownership in Ohio (multiple reasons possible) • ownership succession 58% • divestiture of plants & divisions 11% • averting shutdown or major job loss 5% • blocking a takeover or purchase by another company 6% • financing expansion of company 10% • reducing borrowing costs 15% • replacement of another benefit plan 10% • additional benefit plan 35% • philosophical commitment to employee ownership 44% Ohio Employee Ownership Center

11. Why ESOPs are used in ownership succession • Tax reasons: Owners of closely held businesses who sell 30% or more of the shares in the business to employees through an ESOP or a co-op can avoid the tax on the capital gain • Fair price: Employees pay an appraised “fair market value” for the business • Philosophy: Many owners would prefer to sell to their employees • Financing: ESOPs provide low-cost financing for employee purchase Ohio Employee Ownership Center

12. Advantages of employee ownership in succession • Employees buy and continue successful businesses – rather than their being sold to competitors • Purchase anchors jobs in community • Continued local ownership maintains the higher local multiplier effect Ohio Employee Ownership Center

13. II. Employee ownership & competitiveness Ohio Employee Ownership Center

14. Impact on company performance – 1 • Employee ownership improves company performance relative to pre-employee ownership performance • Difference in Post‑ESOP to Pre‑ESOP Performance (2000) • Annual sales growth +2.4% • Annual employment growth +2.3% • Difference between ESOP and non-ESOP productivity • Productivity edge of ESOP firms +6.2% • Source: Douglas Kruse and Joseph Blasi, Rutgers University Ohio Employee Ownership Center

15. Impact on company performance – 2 Employee ownership + employee participation makes the difference Sales growth of participatory employee-owned firms rose 7.2% faster than that of their competitors. Sales growth of non-participatory employee-owned firms lagged that of their competitors by 4.3%. Baseline (0.0%) equals sales growth of competitors. Source: Jim Keogh and Peter Kardas, Washington State study Ohio Employee Ownership Center

16. Impact on company performance – 3 Organizational development and change in profits relative to industry (percent of firms) Increasing avenues for participation correlates with increased profits Ohio Employee Ownership Center

17. Impact on on job retention & creation How Ohio ESOPs compared with their industries in job creation and retention Ohio Employee Ownership Center

18. Increasing employee influenceSource: Ohio study Ohio Employee Ownership Center

19. Impact of increasing employee influence Non-managerial (NM) directors and firm performance (percent of firms) Ohio Employee Ownership Center

20. III. Employee ownership & inclusion Ohio Employee Ownership Center

21. Impact on total employee compensation 1999 comparison of wages and benefits in matched ESOP and non-ESOP companies Source: Peter Kardas, Adria Scharf, and Jim Keogh, 1999 Washington State study Ohio Employee Ownership Center

22. Impact on creation of wealth Ohio wealth creation through ESOPs Source: IRS Form 5500 filings, Larkspur Data Resources Ohio Employee Ownership Center

23. Cost effectiveness of employee-ownership support agencies • Over the last 10 years, the rate of ESOP growth in Ohio has been more than twice that of the US as a whole • Ohio employee-owned sector also appears to be more democratic and more participatory • Why? Role of Ohio Employee Ownership Center Ohio Employee Ownership Center

24. Impact indicators for OEOC, 1987-2004 • Worked with 485 companies employing 93,000 to explore employee ownership • Assisted employees in buying part or all of 71 companies, creating 14,000 new employee owners • Cost in state funds per job retained or stabilized has been about $250/job • These companies created $300 million in equity for employee owners by 2001 • We estimate that this employee equity position grows by $20 million annually despite retirees taking out about $10 million annually Ohio Employee Ownership Center

25. IV. Employee Ownership and the Community Ohio Employee Ownership Center

26. Impact on community life Comparison of two Italian communities in Emilia Romagna Source: David Erdal, 1999 Ohio Employee Ownership Center

27. Employee ownership and community economics Impact on local economy • Anchors capital locally • Increases rate of reinvestment • Higher local multiplier effect Impact on families • Increases job security • Builds family assets Impact on community • Stabilizes tax base and community economics Ohio Employee Ownership Center

28. Employee ownership and the employee owner Employee ownership provides an additional pension & financial return Participatory employee ownership also provides • greater job-level influence • some additional opportunities for training • more insight into the business • profit sharing in good times • more job security in bad times Ohio Employee Ownership Center

29. Community competitiveness Sustainable community economies rest on • Competitive firms • Good wages and benefits • Anchored capital and jobs • Broad ownership of productive assets & asset creation • High local multipliers Remember: There is no productivity in an unemployment line Ohio Employee Ownership Center