Imagine a world where workers share in the fruits of their own labor. Now imagine that this world is within our reach. While the Harvard Business School is just starting to consider new economic paradigms beyond capitalism and its incessant exploitation of workers, Colorado state officials and residents are taking bold action to create the world that we want to inhabit—one marked by thriving worker-owned businesses and a far more equitable distribution of wealth.
Employee ownership can take many forms, including worker cooperatives, employee stock option plans (ESOPs), “hybrid” employee-owned LLCs and corporations, and employee-ownership trusts. While the National Center for Employee Ownership defines employee ownership as “any arrangement in which a company’s employees own shares in their company or the right to the value of shares in their company,” in a worker cooperative, ownership means not just sharing profits, but having a direct voice and vote in the workplace.
Broad-based employee ownership can help to preserve businesses and sustain quality jobs…it can also bring democracy to the workplace.
The benefits of employee ownership are demonstrable and manifold. According to NCEO, employee-owners have higher wages and net worth, receive better workplace benefits, and are less likely to lose jobs during a downturn compared with workers who do not have an ownership stake in their place of employment. A recent study found that employee-owned businesses, defined as employee ownership of at least 30 percent of business shares, which all employees having access to owning, are more productive, grow faster, and are less likely to go out of business than non-employee-owned businesses.
In short, broad-based employee ownership can help to preserve businesses and sustain quality jobs. Depending on the ownership structure, it can also bring democracy to the workplace.
According to NCEO, as of December 2021, the US was home to 6,482 ESOP companies with 10.2 million active employee-owners. This number is somewhat deceptive since it includes large public companies where the only employee benefit is stock ownership. But included in that number are 5,880 privately held ESOPs with over 1.5 million employee-owners, many of whom play a significant role in helping to run the company. Additionally, though they form a far smaller sector (about 10,000 people), worker co-ops are growing at a rapid pace of 30 percent per year.
Despite this growth, an estimated 24.7 million people are employed by small businesses and are at risk of losing their jobs as a generation of Baby Boom business owners retires, most with no ownership-succession plan. Employee ownership in many cases could be that plan. But the time to act is limited.
Colorado is home to some of the country’s most favorable cooperative laws. It is also home to many well-known and successful employee-owned businesses, including Namasté Solar, Alpine Bank, Leevers Supermarkets, Hercules Industries, and Sexy Pizza, to name a few.
The state has taken a novel approach to employee ownership, led directly by the state’s recently reelected governor, Jared Polis, who has championed employee ownership since his days as an entrepreneur, incorporating employee ownership into both of his successful startup companies.
Before becoming governor, Polis served as US representative to Colorado’s 2nd congressional district, during which time he supported the Main Street Employee Ownership Act, a 2018 law that expanded cooperatives’ and employee-owned businesses’ access to the US Small Business Administration’s small-business loan guarantees (even if there have been challenges in the act’s implementation).
Polis’ commitment to employee ownership runs deep. In 2017, Polis announced his gubernatorial campaign at an employee-owned grocery store in Colorado Springs.
By April 2019, Governor Polis had signed an executive order to support the creation of the Employee Ownership Office. The executive order also established the “Employee Ownership Commission,” on which both of us currently serve. The commission is tasked with:
- Establishing a wide-reaching network of technical support for businesses wanting to become employee-owned
- Educating businesses and communities on the benefits of employee-owned businesses
- Identifying and removing barriers to the development and advancement of employee-owned businesses
While other states have created temporary employee-ownership offices, Governor Polis’ executive order was the first permanent commitment to employee ownership made by a sitting governor. By housing the Employee Ownership Commission and the Employee Ownership Office within the Office of Economic Development and International Trade, Governor Polis ensured he would receive regular updates from a cabinet-level director, meaning that an employee-ownership advocate is at the table when state government economic policy decisions are being made. Colorado is believed to be the first US state to house employee-ownership-related programming and support within an executive agency. (California and Massachusetts have since followed Colorado’s lead.)
Colorado’s legislative support of employee ownership is also strong. In 2017, then Governor John Hickenlooper (now US Senator) signed HB 17-1214, which established a revolving loan fund to help businesses transition to employee ownership and required OEDIT to work with a local nonprofit to support and provide outreach on employee ownership.
In 2019, the commission set up the loan program as well as a grant program to reduce business transition costs. Prior to 2019, the state saw only a few conversions each year. Since the grant program opened, the state is averaging about 20-25 conversions per annum. OEDIT maintains a small business navigator ombudsman position to give direction and guidance to business owners interested in transitioning to employee ownership.
In 2021, the state legislature further expanded its support of employee ownership by passing HB 21-1311, which provided $10 million annually for five years in tax credits to fund the professional service costs (legal, accounting, and so on) of conversion to employee ownership. This represents the largest financial commitment by a state to support employee ownership in the nation. Given this recent investment in outreach and education efforts, coupled with heightened interest from local governments, we expect to see many more employee-owned businesses statewide in the next five years.
Another driver of this statewide effort is the need to close an enormous racial wealth gap. A recent Denver study notes that the homeownership gap between Whites and Blacks, a common proxy for the racial wealth gap, is greater today than it was 50 years ago. Employee ownership makes one’s job a valuable business asset (often worth well over $100,000), and can be a powerful way for workers of color to build wealth.
Building a Broad Coalition
Colorado has harnessed and engaged a broad coalition of support from the business community, professional service providers, policymakers, banking, philanthropy, and community organizers. The primary employee-ownership technical assistance providers in the state—the Center for Community Wealth Building, Rocky Mountain Employee Ownership Center, and Rocky Mountain Farmers Union Cooperative Development Center—now have direct support from OEDIT to advance conversions.
OEDIT has successfully incorporated community wealth building as a pillar of its economic development toolkit. This involves activating and collaborating with the state’s Minority Business Office and working with community groups to provide culturally relevant programming and support. The employee-ownership grant program is especially important because it helps to ensure that the benefits of employee ownership reach low-income residents and residents of color.
Addressing the Obstacles
Without broad-based efforts to shift this mindset, achieving systemic changes that advance employee ownership will remain challenging.
Despite these advances, much work remains to be done. The perennial refrain continues to ring true: to make employee ownership mainstream, business owners and workers need to know that employee ownership is an option. Sixty-eight percent of business owners participating in the Colorado State of Owner Readiness survey indicated they have devoted minimal time and attention to their exit. This is concerning as the same survey indicated that seven in 10 Colorado small-business owners intend to sell their business in the next 10 years. Given that only one in five businesses can expect to find an outside buyer, selling to employees is one of the safest ways for owners to exit their business.
Awareness is one obstacle, but it is hardly the only one. Here are some others:
- Diverse Representation: Colorado employee ownership advocates have activated a diverse coalition, but diversity and inclusion is needed at all levels—including in the state commission and among technical service providers, direct practitioners, and potential employee-owners. We know that employee ownership can be a powerful tool to close the racial wealth gap. Yet in Colorado, people of color are grossly underrepresented in the employee-ownership field. Intentional efforts are required to achieve equity.
- Barriers to Capital: Many practices and policies limit potential employee-owners’ access to capital. For example, to secure loans to finance employee-ownership conversions, personal loan guarantees are often required. The Main Street Employee Ownership Act sought to expand access to capital by loosening this rule, but bureaucratic red tape has held implementation up. Impact investment and non-bank financing from community development financial institutions also remain limited.
- Developing Professional Supports: Streamlining handoffs and communication is essential to speed conversions and reduce costs. Achieving this means coordinating quality technical assistance with legal, accounting, and financing providers.
- Building the Culture: Perhaps the most important and intractable obstacle to establishing more employee-owned businesses is culture. Advocates must create a cultural shift within individuals, communities, institutions, and systems.
Unlike international centers of employee ownership, like the Basque Country in Spain and Emilia Romagna in Italy, in the US, especially white America, the values of shared prosperity and broad-based ownership are not widely held. Americans tend to lionize the “self-made millionaire” (now “billionaire”) and laud those who “pick themselves up by their bootstraps.” Without broad-based efforts to shift this mindset, achieving systemic changes that advance employee ownership will remain challenging.
This means advocates of employee ownership must recognize that part of our work is countercultural: we must change the narrative of who our economy serves and how. We must normalize the belief that a homegrown company can succeed by treating its workers well, creating real value, and distributing earnings to its workers. This requires creating a business culture that prioritizes broad prosperity above scale, market dominance, or short-term metrics of success. It requires more human-centered business relationships.
Leveraging the Ecosystem
While Colorado has begun to address barriers to employee-ownership conversion, including limited access to capital, other ecosystem players must also invest in employee ownership. Individuals, philanthropy, financial institutions, and government at all levels can align the tools, resources, and social capital at their disposal to support employee-owned business.
For example, philanthropy can employ program-related investments and grants to support the technical assistance and affordable capital needs of employee-owned businesses. For cooperatives in low- and moderate-income communities, philanthropy can provide stipends to enable employees to work on the clock to develop their cooperatives. Another option would be to seed secondary cooperatives (that is, organizations that support co-op businesses) to increase the efficiency of cooperative networks. Foundations can boldly commit a set amount of their endowment—say one percent—to investing in employee ownership.
Financial Institutions can work with cooperative and employee-ownership groups to create an alternative to the personal guarantee. For instance, they could work with sectoral organizations to develop an insurance product that functions like personal mortgage insurance, which supports homeownership for people unable to make a 20-percent down payment.
Foundations can boldly commit a set amount of their endowment—say one percent—to investing in employee ownership.
Local governments have an opportunity to mainstream employee ownership by training economic development professionals on the various employee-ownership models and funding positions to support co-op education and outreach. They can invest in marketing to reach business owners who are ready to retire. Increasing business owners’ understanding of employee ownership and its potential as an exit strategy can help to ensure successful ownership transitions, maintaining and even strengthening the local tax base.
In addition to passing legislation, the state government can support public banking and ensure that public dollars circulate in the community and contribute to financing conversions of businesses to employee ownership. At the federal level, reforms could include amending the Community Reinvestment Act to support employee ownership through improved access to capital and technical assistance, as Senate Bernie Sanders (I-VT) proposed in 2019.
Employee ownership faces many challenges, but it has a proven track record. The potential for its expansion, particularly in states like Colorado, where officials are backing employee ownership, is significant.
Although Colorado’s efforts are far from perfect, they are helping to build a foundation that’s already making a difference in the employee-ownership sector. The work ahead is clear. Building an ecosystem that supports employee ownership requires a combination of community action, education, philanthropic support, and favorable government policy. Given the pending retirement wave of aging small-business owners, there is no time to lose.
While Yessica Holguin and Jason Wiener currently serve on the Colorado Employee Ownership Commission, nothing in this article should be taken as the official position of the Employee Ownership Commission or the Employee Ownership Office.
This article originally appeared in the Nonprofit Quarterly. See the original article here.