In the United States, we could live in a time of plenty. Capitalism has the capacity to produce more than enough of life’s necessities—such as food, water, and shelter. And over the past several decades capitalism has produced technological innovations that have raised living standards for millions of people. And yet, there is a glaring problem with capitalism: inequality.
While capitalist economies typically excel in production, they have not always done as well with distribution. In the United States, most income groups in the working middle class have experienced relatively little real wage growth over recent decades, while higher income groups have seen their earnings soar. This stagnation among America’s working middle is often hidden by economic reports that describe average worker or household gains with unequal distribution; the median lags the mean by a wide margin.
Similarly, strong economic data from Wall Street is not often felt on Main Street, since the wealthiest 10% of Americans now own 93% of stocks. Today, the United States leads OECD countries in terms of wealth inequality and lags OECD countries in terms of economic and social mobility. Some researchers have described this growing class divide as the fading American Dream.
Employee share ownership could play a role in addressing the conflict between American capitalism and the American dream. Research shows employee-owned businesses perform as well as, and sometimes better than, peer companies that do not share equity and profits with workers. Furthermore, workers experience higher job quality at employee owned companies. In addition, working for a company with employee share ownership is an idea that has broad appeal across the political spectrum as well as across a range of demographic groups. The solid business performance, benefits for workers, and broad appeal should lead more businesses to adopt employee-share ownership structures, but unfortunately the odds are often stacked against employee ownership.
One set of systems stacked against employee share ownership has been the small and closely held business support systems—banks, accountants, lawyers, and advisors that serve closely held businesses. The professionals working in these areas often have little familiarity with Employee Stock Ownership Plans (ESOPs) or other employee share ownership structures. Consequently, retiring business owners looking to sell their business to their employees often find accessing needed financial, legal and other supports to be challenging. Indeed, many retiring business owners will not even consider this option, as none of their advisors are likely to mention it.
Some advisors and business owners also may have misperceptions that will lead them to advise against an employee buyout. For example, advisors or business owners may mistakenly believe employees have to pay for the business out of their pockets, raising concerns whether employees have sufficient financial capacity. But ESOP transactions are typically debt-financed, with the debt repaid through future business earnings, building wealth over time for the worker owners in much the same way that a mortgage can help homeowners build wealth.
There are significant tax benefits for a retiring business owner that sells to employees and for the new ESOPs that are set up after the transition, so that is a helpful encouragement. But confounding factors can make financing the deal a challenge. The principal barrier is that retiring business owners often need to self-finance part of the sale because a company may not have enough collateral to borrow all the funds from a bank or other lender. Uncertainty around an acceptable valuation can at times present risk of lawsuits or other action should business performance suffer after a founders exit.
Over half of small business owners are near or at retirement age. Surveys frequently show, however, that few small businesses have a succession plan in place. This lack of support for conversions to employee ownership is a big miss for communities across the country that seek to retain small businesses—and the jobs and wealth that they create.
Some of these issues could be addressed with more favorable public policies. For example, local, state, and economic development programs do not favor employee-owned businesses and in some cases discourage employee ownership despite evidence about the benefits of employee ownership to job retention. State and local governments spend billions on corporate tax incentives that are meant to attract or retain jobs in their jurisdiction. We believe diverting just a fraction of those resources to supporting employee ownership buyouts would likely have a much better effect for these jurisdictions in terms of keeping jobs and wealth in their communities.
Preferences in public contracting for small, locally owned businesses or businesses led by someone from a socially disadvantaged group are relatively common, but these preferences are not extended to employee-owned businesses, even if all the employee-owners meet the qualification for the preference.
Simply put, our business and economic development systems were not set up to encourage or support broad-based employee ownership. Many business schools do not even teach their students about employee ownership. And because relatively few businesses are majority employee-owned, some business leaders have come to believe that there is something inherently less competitive about employee-owned businesses rather than seeing the many ways the deck is stacked against them.
Fortunately, this may be starting to change. In 2019, Congress passed the Main Street Employee Ownership Act, which instructed the Small Business Administration to support more employee-owned firms. In 2022, Congress passed the WORK Act, which instructs the Department of Labor to establish employee ownership centers in the states and to clarify legal safe harbors for the valuation of ESOP buyouts. The number of states with employee ownership centers, currently 21 states, has more than doubled since 2018. Colorado’s center provides a good example of how state centers can make a difference in the formation of employee-owned firms by promoting awareness of employee ownership and connecting interested firms to sources of technical and financial support.
In 2023, Senators Marco Rubio (R-FL) and Chris Van Hollen (D-MD) introduced the Employee Equity Investment Act, which would provide government-backed loans to help finance conversions to employee ownership, eliminating the need for business owners to self-finance large parts of these deals. We believe these are all positive steps and can help build the kinds of environments that will support the emergence and growth of employee-owned enterprises. There is also potential to expand employee share ownership among large, publicly traded companies.
The history of employee-owned companies, both in this country and in others, demonstrates that it is possible to have companies that are innovative, competitive, and have broad-based employee ownership. These companies show we can have an economy that is successful not only in producing great wealth, but also in sharing it with the people whose labor helps create that wealth. We need to believe that we indeed can have an economy that rewards the work of all—and build the systems that make it the norm.
Maureen Conway is a vice president and the executive director of the Economic Opportunities Program at The Aspen Institute.
Joseph Blasi is the J. Robert Beyster Distinguished Professor at the Rutgers University School of Management and Labor Relations, director of Rutgers’ Institute for the Study of Employee Ownership and Profit Sharing, and a senior fellow at the Aspen Institute.
Matt Helmer is the managing director of The Aspen Institute Economic Opportunities Program.
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