Employee Ownership as a Strategy for Building Wealth for Working Families and Communities

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

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 Hall telephone: 330-672-3028 • Kent State University fax: 330-672-4063 • Kent, Ohio 44240 email: jlogue@kent.edu • http://www.kent.edu/oeoc Ohio Employee Ownership Center

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

4. 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” Ohio Employee Ownership Center

5. 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 Ohio Employee Ownership Center

6. 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 Ohio Employee Ownership Center

7. The employee-owned sector in the US today Source: National Center for Employee Ownership, 2006 Ohio Employee Ownership Center

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

9. 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) Ohio Employee Ownership Center

10. Reasons for employee ownership (multiple reasons possible) • ownership succession 58% • divestiture of plants & divisions 11% • averting shutdown or major job loss 5% • blocking a takeover or purchase by another company 6% • financing expansion of company 10% • reducing borrowing costs 15% • replacement of another benefit plan 10% • additional benefit plan 35% • philosophical commitment to employee ownership 44% Source: Ohio study data, Logue & Yates, Real World of Employee Ownership, Appendix Ohio Employee Ownership Center

11. Example: Fastener Industries Manufactures fasteners – nuts, bolts, weld fasteners, levelers Third generation family owners sold to employees in 1980 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 Specialized in short run, hard to make fasteners Manual workers retiring with accounts in $4-500,000 range Ohio Employee Ownership Center

12. Example: Casa Nueva Employee cooperative members, Casa Nueva, Athens, Ohio Employee-owned restaurant cooperative • 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 Ohio Employee Ownership Center

13. Example: Producers Services 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 4th in Ohio in assets per employee owner: an average of $259,000 Producers Services, Zanesville, Ohio Ohio Employee Ownership Center

14. 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. Ohio Employee Ownership Center

15. 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 Ohio Employee Ownership Center

16. 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 Ohio Employee Ownership Center

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

18. 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 Ohio Employee Ownership Center

19. Impact on total employee compensation 1999 comparison of wages and benefits in matched ESOP and non-ESOP companies Source: Peter Kardas, Adria Scharf, and Jim Keogh, 1999 Washington State study Ohio Employee Ownership Center

20. Impact on creation of wealth Ohio wealth creation through ESOPs Source: IRS Form 5500 filings, Larkspur Data Resources, for the years in question Ohio Employee Ownership Center

21. ESOP Impact on Employee Influence in Ohio - 1 Source: Logue & Yates, Real World of Employee Ownership, 2001 Ohio Employee Ownership Center

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

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

24. 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 Ohio Employee Ownership Center

25. Comparison of employee-owned firms to their industries Source: Ohio ESOP survey, 2003-06 Ohio Employee Ownership Center

26. Can we do more? Select Machine employees pose with sellers after signing transaction papers, Brimfield, Ohio, Oct 1, 2005 • 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) Ohio Employee Ownership Center

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