Government should support employee ownership

Hey there, time traveller!
This article was published 14/05/2021 (1615 days ago), so information in it may no longer be current.

 

Hidden amongst the many newsworthy items in last month’s federal budget is a small, little discussed section with the potential to reshape many Canadian industries. In it, the government commits to exploring options to remove barriers to employee ownership trusts in Canada.

While that may sound pretty boring, we can look to the recent sale of Longo’s, the beloved Toronto-area grocery chain, to understand just how important this decision might be.

Long rated one of Canada’s best managed companies, and with high marks for its customer service, Longo’s was one of the few major independent retailers left in Canada, where Empire, Loblaw and Metro control 75 per cent of the market.  Founded by three brothers in 1956, it remained family-owned and run by one of the sons of the founders, Anthony Longo.

In mid-March that independence ended, as Empire, the owners of Sobeys, announced it would be buying a controlling interest. Media reports described the deal as inevitable; as the Canadian grocery industry continues to consolidate, what chance did a local, family-owned chain have against the giants?  

In the United States, however, the fate of grocers like Longo’s is anything but inevitable. A very different option is available, with a track record of keeping family grocers both successful and independent: employee ownership.

Publix Super Markets, WinCo Foods, Brookshire Brothers, Harps Food Stores and Buehler’s Fresh Foods are all similar to Longo’s in many ways: humble beginnings, growing through the hard work and risk-taking of the founding family, and dedication to tremendous customer experience. Unlike Longo’s, the founding families of these thriving grocers rebuffed the offers of America’s largest chains and instead chose to sell to their employees.

The difference is due to the Employee Share Ownership Plan (US-ESOP), an employee ownership trust structure created in the U.S. in the 1970s to make it easier for business owners to sell to their employees. Different from share purchase plans, option plans or worker co-ops, the US-ESOP ensures all employees get a stake in the company, at no cost to them, while keeping a traditional management structure in place and ensuring owners receive market value for their shares.

The program has been so successful that tax incentives to increase adoption have been added over time by both Democrats and Republicans, and currently more than 14 million Americans hold $1.4 trillion in company wealth under the country’s 6,500 US-ESOPs. 

There is strong evidence that employee ownership is better for companies, employees and the economy itself, and grocery might be the best example of that. No ESOP-owned grocer has ever gone bankrupt. Of the 12 U.S.-based grocery bankruptcies since 2015, 11 were private equity-owned. The twelfth was industry giant Kroger’s failed acquisition of popular locally-owned Lucky’s Market, a grocer of similar size to Longo’s.

Across all industries, employee-owned companies in the U.S. grow faster, are more profitable, are more resilient in downturns, stay in their communities longer and pay their employees more. 

US-ESOPs are also a powerful wealth creating engine for workers. On average employee-owners have 92 per cent more wealth than non-employee-owners, while many front-line employees at grocers Winco and Publix have become millionaires.

That doesn’t mean we should blame the Longo family for their choice. There is very little employee ownership in Canada, as selling to employees here has been a long, complicated and painful process. EllisDon, one of Canada’s largest construction companies, is also one of its most successful employee-owned companies. But its ownership transition from the founding Smith family has taken decades, and Geoff Smith, its CEO, recently took to LinkedIn to encourage the Canadian government to make it easier.

It appears government listened, and significant employee ownership of the Canadian economy might not be far behind. The U.K. introduced employee ownership trusts in 2014, providing incentives for owners to choose employee ownership over other options, and investing in awareness building in the business community. Employee ownership has dramatically increased ever since, with almost 100 U.K. companies choosing this path in 2019 alone. 

A recent Canadian Federation of Independent Business survey suggests similar uptake in Canada should be expected. One day soon, employees at companies like Longo’s might wake up to find they are now owners, with a real path to wealth for them and their families.

Employee ownership trusts increase resiliency, broaden opportunity and reduce ownership concentration, all key elements of a more inclusive economy. The federal government’s commitment to investigating their potential should be applauded. 

Jon Shell is managing director of Social Capital Partners, a nonprofit that seeks to reduce inequality by broadening access to ownership and good employment. SCP recently led the financing of U.S.-based Taylor Guitars’ conversion to 100 per cent employee ownership.