2020 Lane Reports

“Steward Ownership” Gains Ground!

The Lane Report, January 2020
Thursday, January 2, 2020 10:00 am
by Marc J Lane

“Steward Ownership” Gains Ground!

By Marc J Lane

An executive decision to include a company’s employees in ownership can contribute to their financial security and give them a welcome voice in management. It can also boost the company’s profitability and reduce its tax burden.

No wonder some 11 million U. S. workers participate in tax-efficient stock purchase plans. Another 9 million or so hold stock options, giving them the right to buy company stock at a discount or at a stated fixed price.

But the most common structure for broad-based employee ownership is the “employee stock ownership plan,” or ESOP. About 6,500 U.S. companies have installed ESOPs, and approximately 14 million U.S. workers are ESOP participants.

An ESOP is actually a type of retirement plan that invests primarily in a company’s stock and holds its assets in a trust set up for its employees. The employee-participants accrue shares in the plan over time, and are paid out when those shares are bought back, usually as employees leave the company. And therein, despite everyone’s good intentions, sometimes lies the rub.

The federal regulations governing ESOPs and other retirement plans make it challenging for trustees to manage cash flow as older employees retire and cash out. When an ESOP is a company’s majority shareholder, those same regulations give those trustees no choice but to accept a lucrative purchase offer from an outsider.

Plan trustees are fiduciaries bound to maximize the value of the ESOP’s shares and would be liable for damages to employee shareholders if that duty is breached. Although plan participants and other company owners would stand to benefit financially from a sale of the company, any commitment to employee ownership evaporates when control of the company shifts away from an ESOP’s trustees.

That’s exactly what happened to two beer companies, most of whose shares were owned by ESOPs, Full Sail Brewery which was acquired by a private equity firm and New Belgium Brewery by a multinational craft brewing company. Each company had been successfully run by a socially conscious co-founder who, despite her deep concern for the company’s employees, was left with no alternative but to sign off on a sale.

That’s why Organically Grown Company, a major distributor of organic fruits and vegetables, scrapped its ESOP which, together with farmers in the company’s supply chain, owned the company’s shares. Those shareholders sold all their shares in the company to a multi-stakeholder trust which now represents the interests not only of the employees and farmers, but also of the company’s investors and customers as well as the community at large. These stakeholder groups equitably divvy up the company’s profits and select representatives to a “trust protector” committee which appoints the company’s board of directors. The committee, recognizing that profits are a means to an end and not an end in themselves, holds the board accountable for achieving the company’s collectively defined social and environmental goals along with its financial goals.

Conceptually, Organically Grown’s “steward ownership” is not unlike a community land bank into which real estate is transferred for the common good. The essential asset (here, the business) is taken off the market for speculative investment and instead is dedicated to a higher purpose (here, the transformation of the food system).

Organically Grown Company’s trust structure represents a successful departure from conventional profit-maximization business models while escaping the unintended consequences of employee ownership. So does the Low-profit Limited Liability Company which engages its diverse stakeholders around charitable or educational priorities that can’t be waived or negotiated away, a unique feature that helps explain why more than 2,000 social ventures around the nation have been organized as L3Cs.

Both approaches to governance permanently and irrevocably unite a company’s stakeholders in their shared pursuit of mission. For that reason, each form of steward ownership deserves the serious consideration of the social enterprise community.

_______________________

Marc J. Lane is a Chicago attorney and financial adviser and the vice chair of the Cook County Commission on Social Innovation. He drafted Illinois’ L3C legislation.

 

  The Law Offices of Marc J. Lane, A Professional Corporation
70 West Madison Street, Suite 2050
Chicago, Illinois 60602-4256
(312) 372-1040
Nationwide: (800) 372-1040
Facsimile (312) 346-1040
Email: success@marcjlane.com
Websites: www.MarcJLane.com

 

Announcing Marc J. Lane's 35th Book:

The Mission-Driven Venture: Business Solutions to the World's Most Vexing Social Problems

More About The Book
Our monthly newsletter