1. 1 Employee Ownership as a Strategy for Building Wealth for Working Families and Communities Prepared for the Campaign for America’s Future Conference, Washington, DC, June 19, 2007 John Logue Ohio Employee Ownership Center Employee Owners pose at Falcon Industries Employee-owned Kraft Fluid host visitors

2. 2 Ohio Employee Ownership Center Mission: Broaden ownership of productive assets among Ohio workers and deepen that ownership through employee participation in decision making Impact: Since 1987 the OEOC has worked with 535 employee groups and retiring owners to explore whether employee ownership made sense for them; of these 79 firms have become partly or completely employee- owned, creating 14,500 new employee owners. Through 2003, 49 of these firms had created $349 million in equity for their employee owners. Contact information 113 McGilvrey Halltelephone: 330-672-3028 Kent State Universityfax: 330-672-4063 Kent, Ohio 44240email: jlogue@kent.edu http://www.kent.edu/oeoc

3. 3 I. Employee Ownership and Asset Creation There are a number of forms of employee ownership in the United States…

4. 4 Ohio Employee Ownership Center 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 Consequently ESOPs are an excellent tool for employees to buy companies May own anywhere from a tiny minority share to 100% of the company ESOPs are highly regulated “qualified employee pension plans”

5. 5 Ohio Employee Ownership Center Forms of employee ownership (continued) 2. Broadly distributed stock options Public companies: contingent compensation for employees rather than long term ownership Closely held companies: Must be coupled with internal market 3. Employer stock in 401(k) plans Many companies match employee 401(k) contributions in company stock Some public companies provide purchase of company stock as a 401(k) investment option

6. 6 Ohio Employee Ownership Center Forms of employee ownership (continued) 4. Direct employee stock ownership (stock purchase plans) No tax advantages Sense of direct ownership 5. Cooperatives Fewer tax advantages Fairly flexible – especially under Ohio law Most advantageous in smaller companies “Born democratic” – members control the co-op

7. 7 Ohio Employee Ownership Center The employee-owned sector in the US today Type of ownershipCompaniesEmployee- owners Employee Equity ESOPs9,22510.1 million$600 billion Broad-based stock options 4,0009 million“several hundred billion” 401(k) Savings plans holding company stock 2,200 plans4 million$75 billion Stock purchase plans4,00012 millionno estimate on value CooperativesSeveral hundred worker cooperatives perhaps 10,000 employees no estimate on value Source: National Center for Employee Ownership, 2006

8. 8 Ohio Employee Ownership Center II.Landscape of Employee Ownership Brainard Rivet employees rally to buy plant, Girard, OH, 1997. Photo: Emil David

9. 9 Ohio Employee Ownership Center A profile of ESOP companies In Ohio there are about 400 partially or wholly employee-owned companies with about 400,000 employee owners Median sales:$15 million Median employment:110-120 employees Closely held:85% of companies Closely held:17% of employees 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% Source: Logue & Yates, Real World of Employee Ownership (Cornell UP,2001)

10. 10 Ohio Employee Ownership Center Reasons for employee ownership (multiple reasons possible) ownership succession58% divestiture of plants & divisions11% averting shutdown or major job loss 5% blocking a takeover or purchase by another company 6% financing expansion of company10% reducing borrowing costs15% replacement of another benefit plan10% additional benefit plan35% philosophical commitment to employee ownership44% Source: Ohio study data, Logue & Yates, Real World of Employee Ownership, Appendix

11. 11 Ohio Employee Ownership Center Example: Fastener Industries Below: Fastener employees who bought the company in 1980 and who were still working there at the 2005 party for 25th anniversary of the ESOP & 100th anniversary of company – Berea, Ohio Manufactures fasteners – nuts, bolts, weld fasteners, levelers Third generation family owners sold to employees in 1980 Specialized in short run, hard to make fasteners Manual workers retiring with accounts in $4- 500,000 range

12. 12 Ohio Employee Ownership Center Example: Casa Nueva Employee cooperative members, Casa Nueva, Athens, Ohio set up by 8 unemployed restaurant workers in 1985 after their previous employer went bankrupt has created a market for higher value-added products for area farmers spun off a bakery co-op incubator for entrepreneurship Employee-owned restaurant cooperative

13. 13 Ohio Employee Ownership Center Example: Producers Services Producers Services, Zanesville, Ohio Oil field service firm 1994: at bottom of drilling cycle, assets sold to Chinese – employees protest and buy 73% of company 1998: employees bought remainder 2003: company ranks 4 th in Ohio in assets per employee owner: an average of $259,000

14. 14 Ohio Employee Ownership Center As an asset creation strategy… All forms of employee ownership link income from work and asset creation. The linkage between income and assets makes the assets more sustainable. Employee ownership of companies also makes the income more sustainable. Most forms of employee ownership create long-term assets that grow through productive investment Some forms – democratic ESOPs and co-ops – also create greater employee control over their working lives.

15. 15 Ohio Employee Ownership Center III. Impacts of employee ownership Employee ownership improves company performance Difference in Post ‑ ESOP to Pre ‑ ESOP Performance (2000) Annual sales growth +2.4% Annual employment growth +2.3% Source: Douglas Kruse and Joseph Blasi, Rutgers University

16. 16 Ohio Employee Ownership Center Why? 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

17. 17 Ohio Employee Ownership Center Employee Participation in Ohio ESOP firms and Change in Profits Relative to Industry (percent of firms) Source: Logue & Yates, 2001 Percent of Ohio ESOP firms more profitable than industry by increased opportunity for employee participation

18. 18 Ohio Employee Ownership Center Impact on job creation How Ohio ESOPs Compared with Their Industries in Job Creation and Retention during the 1990-92 Downturn Source: Logue & Yates, Real World of Employee Ownership, 2001

19. 19 Ohio Employee Ownership Center Impact on total employee compensation 1999 comparison of wages and benefits in matched ESOP and non-ESOP companies ESOPnon-ESOP Average wage:$19.09 $17.00 Median wage:$14.72$13.58 Average retirement assets ESOP$24,2600 other plans7,953$12,735 Total retirement assets$32,213$12,735 Source: Peter Kardas, Adria Scharf, and Jim Keogh, 1999 Washington State study

20. 20 Ohio Employee Ownership Center Impact on creation of wealth Ohio wealth creation through ESOPs 1993 2001 Average equity per employee owner$24,500$68,000 without 3 top outliers$19,060$40,000 Source: IRS Form 5500 filings, Larkspur Data Resources, for the years in question

21. 21 Ohio Employee Ownership Center ESOP Impact on Employee Influence in Ohio - 1 Percent using technique before ESOP Percent using technique after the ESOP Suggestion system53%67% Problem solving teams25%52% Self-managing work groups14%26% Non-managerial employees on Board of Directors 017% Source: Logue & Yates, Real World of Employee Ownership, 2001

22. 22 Ohio Employee Ownership Center ESOP Impact on Employee Influence in Ohio - 2 (percent of firms) Nonmanagerial (NM) Directors and Firm Performance Source: Logue & Yates, 2001

23. 23 Ohio Employee Ownership Center IV. Employee ownership and community economics

24. 24 Ohio Employee Ownership Center Employee Ownership & the community Anchors capital in the community Secures jobs with better wages and benefits Increases the rate of reinvestment Stabilizes/grows the tax base Increases home ownership Builds wealth for working families Increases employee influence on job Some evidence that it also contributes to greater civic participation, personal satisfaction with life, and better health Employee discussion at PT Tech

25. 25 Ohio Employee Ownership Center Comparison of employee-owned firms to their industries Worse than industry Better than industry Change in employment – last 3 years9%37% Outsourcing jobs0%49% Rate of capital investment17%31% Non-managerial wages7%28% Benefits2%49% Change in profitability15%29% Source: Ohio ESOP survey, 2003-06

26. 26 Ohio Employee Ownership Center We can encourage employee ownership in business ownership succession throughout the country We can create state & local employee ownership programs We can integrate employee owner- ship in the overall state & local economic development strategies We can create new financing sources Large institutions (hospitals, universities), which are contracting out already, can contract with new employee service co-ops (food services, laundry, janitorial services) Can we do more? Select Machine employees pose with sellers after signing transaction papers, Brimfield, Ohio, Oct 1, 2005

27. 27 Ohio Employee Ownership Center National: The ESOP Association www.esopassociation.orgwww.esopassociation.org National Center for Employee Ownership www.nceo.orgwww.nceo.org The National Cooperative Business Association www.ncba.coopwww.ncba.coop National Cooperative Bank www.ncb.coopwww.ncb.coop State: Massachusetts Employee Ownership Office www.masseio.orgwww.masseio.org Northcountry Cooperative Development Fund http://ncdf.coophttp://ncdf.coop Vermont Employee Ownership Center www.veoc.orgwww.veoc.org Ohio Employee Ownership Center www.kent.edu/oeocwww.kent.edu/oeoc For more information on ESOPs and Co-ops