1. 1 Employee Ownership & Economic Sustainability Competitiveness, Inclusion, and Wealth Creation John Logue Professor, Kent State University Director, Ohio Employee Ownership Center 113 McGilvrey Halltelephone: 330-672-3028 Kent State Universityfax: 330-672-4063 Kent, Ohio 44240email: 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. 2 I. The Landscape of Employee Ownership in the US and Ohio

3. 3 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 Must include at least 80% of permanent, full time employees (unless union opts out) Consequently ESOPs are excellent tools for employees to buy companies and encourage broad ownership

4. 4 Ohio Employee Ownership Center 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

5. 5 Ohio Employee Ownership Center 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

6. 6 Ohio Employee Ownership Center The employee-owned sector in the US today Type of ownershipCompaniesEmployee- owners Employee Equity ESOPs11,0008.8 million$400 billion Broad-based stock options 4,0008-10 million“several hundred billion” 401(k) Savings plans holding company stock 2,200 plans11 million$160 billion Stock purchase plans4,00015.7 millionno estimate on value Worker CooperativesSeveral hundredperhaps 10,000 employees no estimate on value

7. 7 Ohio Employee Ownership Center 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

8. 8 Ohio Employee Ownership Center 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%

9. 9 Ohio Employee Ownership Center Growth of the Ohio Employee Owned Sector 19932001 # of ESOP companies295403 # of employee owners196,000400,000 Value of employee equity$4.8 billion$27.2 billion Source: IRS Form 5500 filings, Larkspur Data Resources

10. 10 Ohio Employee Ownership Center Reasons for employee ownership in Ohio (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%

11. 11 Ohio Employee Ownership Center 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

12. 12 Ohio Employee Ownership Center 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

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

14. 14 Ohio Employee Ownership Center 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

15. 15 Ohio Employee Ownership Center 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

16. 16 Ohio Employee Ownership Center 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

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

18. 18 Ohio Employee Ownership Center Increasing employee influence Source: Ohio study 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%

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

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

21. 21 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

22. 22 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

23. 23 Ohio Employee Ownership Center 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

24. 24 Ohio Employee Ownership Center 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

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

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

27. 27 Ohio Employee Ownership Center 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

28. 28 Ohio Employee Ownership Center 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

29. 29 Ohio Employee Ownership Center 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