Employee ownership: Gaining engagement through transparency and responsibility - Activate World

Employee ownership: Gaining engagement through transparency and responsibility

employee ownership engagement

Loren Rodgers, Executive Director, National Center for Employee Ownership (NCEO)

Loren Rodgers joined the NCEO in 2005 as its research director and became its executive director in 2010. He writes extensively on employee ownership in professional and academic publications and has spoken at events around the world. Since he entered the field in 1995 as a consultant, he has worked with hundreds of companies and presented to thousands of people. His expertise includes employee stock ownership plans (ESOPs), equity compensation, best practices for employee ownership companies, research, effective communications, employee motivation, corporate governance, ESOP transactions and operations, and business literacy. Loren has a master’s degree in public policy from the University of Michigan, where he studied employee ownership and international development with a focus on Slavic Europe.

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Employee ownership: Gaining engagement through transparency and responsibility

Loren Rodgers, NCEO’s executive director, shares his perspectives on employee-owned companies as the basis of a new economy focused on broad-based prosperity, limited wealth inequality, shared sense of ownership, and responsibility for communities and workplaces. Learn about employee stock ownership plans (ESOPs), the main vehicle for broad-based ownership in the U.S., a retirement plan that invests primarily in company stock and holds its assets in a trust, in accounts earmarked for employees.

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Employee ownership: Gaining engagement through transparency and responsibility

Loren Rodgers, Executive Director, National Center for Employee Ownership (NCEO)

Jon Mertz:          00:02          Welcome to the Activate World podcast, a series on how business leaders have move power to solve societal issues than any elected official. We explore business activism with substance and depth of thought. In this episode, we’ll explore employee-owned businesses. Joining us is Loren Rodgers, the executive director of the National Center for Employee Ownership or NCEO. Welcome to Activate World, Loren.

Loren Rodgers:      00:32          Well, thank you Jon. Happy to be here.

Jon Mertz:          00:34          I’m excited to have a chance to talk to you and get some of your insights. What led you to your work at the National Center for Employee Ownership?

Loren Rodgers:      00:41          I started off in this field in 1995. I worked as a consultant there in a company that worked with employee-owned businesses, so I had a good chance to get involved with a bunch of them in sort of a problem-solving level. It’s been just a pleasure to see how people think about business and then the role of business when they’re making active decisions about how to engage their employees as owners.

Loren Rodgers:      01:06          Prior to that, my background had nothing to do with employee ownership. I was an Asian-studies major and planned to go to China to see how the fall of Communism might affect the global economy, but since getting into employee ownership, it’s felt like home. It’s felt like a great combination of a real practically-oriented community that’s trying to make the world a better place in all sorts of practical ways while respecting the values and the highest aspirations in business.

Jon Mertz:          01:35          Does NCEO operate on a global scale or is it mostly focused on the United States?

Loren Rodgers:      01:40          Mostly on the United States. We do a little bit of work in a few other countries. I’ve had a chance to go to Cambodia, and South Africa, and Spain, and the United Kingdom most recently, but China itself has a number of companies that use the employee ownership label for themselves. It’s a little bit opaque as to how genuine that employee ownership is, but part of the privatization, their liberalization and marketization of their state-owned enterprises has involved at least some employee ownership even if it’s in the form of stock options.

Jon Mertz:          02:19          What led to NCEO’s creation, and what were some of the original objectives of the organization?

Loren Rodgers:      02:24          Sure. Yeah, we were founded in 1981. Our founder, Corey Rosen, is still in the office many days. At that point, there already was legislation on the books to support employee ownership largely through employee stock ownership plans.

Loren Rodgers:      02:41          Corey’s idea was that, if we can study the employee-owned businesses, see how they work in practice, and just do an honest, objective evaluation of how they work and, if so, what makes them work best, then that would be the logical starting point for whatever happens next. If the results were disappointing, then maybe the NCEO would just fold up. If they were powerful, then that might affect legislation. It might give the people inside employee-owned companies the tools to best take advantage of the potential power of employee ownership. They’d have an example of what works, what doesn’t work, and some data to support their decision making around capturing the fullest possible potential of employee ownership.

Jon Mertz:          03:28          What have been some of the organization’s key milestones over the last 10, 15 years?

Loren Rodgers:      03:33          Some of the key milestones for us are more along the lines of long-term trends, I’d say. Our membership has been on a long-term upward trend. More and more people are coming to our conferences. We had our annual gathering in Pittsburgh last week, and we had 1,900 people there. Most of those are from companies that are already employee-owned, but there’s a healthy number from companies that are in the process, right now, of trying to decide if it’s a good fit for them.

Loren Rodgers:      04:04          Our mission, both at the conference and in general, is to make employee ownership thrive, so we’re trying to make sure that there is as many employee-owned businesses and as many employee-owners as possible. Then, also, we’re trying to make it bigger in that sense. We’re also trying to make it better in the sense we try to be a resource so that companies that are employee-owned can really harness the full power of employee ownership and recognize some of the best practices.

Loren Rodgers:      04:32          I think one of the things that we’ve seen over the years, sort of in terms of the development of our organization, is we’ve added new staff, new capabilities, and we’ve got a whole range of tools now that our members take advantage of to try to really capture the potential of employee ownership while avoiding any of the possible downfalls. There are some ways to do it wrong, and we’re here to help companies be sure they don’t do that.

Jon Mertz:          04:57          I know, at your last conference, you had about 1,900 members in attendance. What were some of the hot topics of conversation?

Loren Rodgers:      05:04          Some of the big topics that came up again and again at the conference, one was the interesting level of federal support for employee ownership right now. Just last year, the Main Street Employee Ownership Act was passed on a very strongly bipartisan basis, and that’s done a lot to encourage the Small Business Administration to promote the development of employee ownership. We’re delighted with that development. That’s one thing we talked about a fair amount.

Loren Rodgers:      05:30          Another topic that came out often in conversation was the idea of employee ownership sustainability. How do companies design their employee ownership plans? How do they build their finances and their business models in a way that makes it so that it’s possible for them to stay around for the long term so that they’re building a perpetual business that exists for all time for the benefit of the employees and all their other stakeholders?

Loren Rodgers:      05:58          In the case of an employee-owned business, there are a lot of pieces that go into that. They need to figure out what the expected obligation is for them to buy back the employee ownership stakes of people who leave the company at retirement, for example, so it does take a fair amount of financial planning. It also takes some good thought about governance and management of the organization so there’s always a next generation of leaders waiting in the wings to keep the company healthy, not just this year or next year, but in 5 years, in 10 years, in 20 years. We had a lot of people talking about that as well.

Loren Rodgers:      06:31          One of the other topics, which I think was different at this conference than any of our prior conferences, was there was a lot of energy and interest around state and local governments and the roles that they play in promoting employee ownership. We were delighted to be in Pittsburgh. Pittsburgh is in the process of putting together some city-to-city networking around employee ownership. Philadelphia has also done some work to promote employee ownership for businesses within its city limits. Massachusetts just relaunched its Office of Employee Involvement and Ownership. Indiana just introduced legislation. Nebraska just passed legislation allowing CPA firms to be employee-owned. There’s just a lot of activity right now at the state and local level.

Jon Mertz:          07:15          Capitalism needs to adapt and be more equitable and have more employee engagement. Is this kind of discussion driving some of the interest in employee ownership?

Loren Rodgers:      07:22          Well, that’s a good point. I’d say one of the fascinating things, for me, about employee ownership is that it’s really an idea of both the left and the right. I’d say some of the more left-leaning political figures and thinkers and policymakers do see it as an issue of making capitalism more equitable, and there is fantastic data around that. I’ll humbly say that one of my favorites is some research by our research director here, Nancy Wiefek, which found that Millennial employee owners, this is from a sample collected by the Bureau of Labor Statistics, so the federal Bureau of Labor Statistics, that employee-owners have 92% greater net household wealth than comparable non-employee owners.

Loren Rodgers:      08:14          One of the richest things about this data set is that it applies to all sorts of demographic groups that nobody has been able to study before, so single moms, people with college educations, without college educations, people of all sorts of different ethnic groups, people who are higher paid and lower paid. The difference in the amount changes from group to group, but the direction is always the same, that employee-owners simply build greater net household wealth.

Loren Rodgers:      08:40          Interestingly, that also applies and some of these similar arguments apply to politicians from the right. The Main Street Employee Ownership Act, which I mentioned, had two sponsors, one from each party, Kirsten Gillibrand, the senator from New York sponsored it, then also so did Jim Risch who is the senator from Idaho. Senator Gillibrand is a democrat. Senator Risch is a Republican. From a Republican perspective, I think they see it as taking capitalism and making it a little bit more capitalist. They’d like to see a capitalism that has more capitalists. They see that as a way of building an economy which is more efficient, which relies less on the government, and which creates a more robust free enterprise system.

Jon Mertz:          09:33          What employee ownership models do you primarily focus on, or where do you see the most interest and expansion?

Loren Rodgers:      09:39          Well, employee ownership, it is quite diverse. I think it’s good to think of employee ownership as a bit of a spectrum. Maybe the most employee-owned possible model, the thing that’s furthest over on the side of the spectrum is a worker cooperative. Workers literally directly own shares of the business. They govern the business democratically.

Loren Rodgers:      10:03          There’s a lot of things that are on the ownership spectrum that don’t do everything that a worker cooperative does. For example, the Silicon Valley model of employee ownership is broad-based stock options where, if the company does well, everybody gets wealthy. Everybody pulls in the same direction because they have a financial interest that is perfectly aligned with their coworkers and with their companies. I think that a broad-based stock option ownership is one of the reasons that Silicon Valley has been the driver of innovation in the world.

Loren Rodgers:      10:39          Some of the other models that are on the employee ownership spectrum, the employee stock ownership plan or ESOP is… Most of the people who came to our conference in Pittsburgh last week are companies that have ESOPs or are thinking about putting one into place. An ESOP doesn’t have all of the democratic governance of a worker cooperative, and workers own the shares in the company through a trust instead of directly, but ESOPs have the advantage of being very easy to set up and have a lot of tax advantages behind them. ESOPs drive a lot of the data that exists about employee-owned companies, like that one about net household wealth that I mentioned.

Loren Rodgers:      11:23          ESOPs tend to create a lot of income for people who wouldn’t otherwise have that level of income, a lot of wealth for people who wouldn’t. They also are more likely to adopt some of the sort of good business practices, participative management, open-book management. A lot of our members are becoming certified B corps or benefit corporations in conjunction with being employee-owned through an ESOP. The ESOP is… I’d say it’s sort of the core of the employee ownership world in the United States, partly because there are so many of them. There are 6,700 companies that have ESOPs in the United States, and they employ millions of workers and have billions of dollars in company stock in their accounts.

Loren Rodgers:      12:15          A new form of employee ownership that’s been emerging is the employee ownership trust, which is actually an old model from the United Kingdom, that’s just been gradually emerging here in the United States recently. I think we’ll see a bunch of growth in that model.

Jon Mertz:          12:31          How is that different than an ESOP?

Loren Rodgers:      12:32          An employee ownership trust is not a benefit plan. An ESOP is a retirement benefit that it owns company stock. An employee ownership trust is just a charitable purpose trust, so it’s intended to hold stock forever. It’s designed to make a company invulnerable to acquisition offers or other things that might disrupt its ownership. An employee ownership trust is much less complicated because it’s not a retirement plan. It’s much cheaper to set up also because it’s not a retirement plan, but it doesn’t provide the same level of tax benefits that an ESOP does.

Jon Mertz:          13:14          Do either one of those make it easier to manage the process of retirement?

Loren Rodgers:      13:18          They both do, yeah. Both the employee ownership trusts and ESOPS are helpful tools for people, for business owners who are approaching retirement. The ESOP is sort of a two-headed creature. It is a retirement plan, and a lot of the provisions for how it works are governed by that, but it is also intended to be way to own a business. It’s intended to be a way for a business owner to sell her company to the employees and keep it locally rooted, tied to the community, not sell it to private equity or a multinational or some other third-party buyer. The ESOP does both of those things. The employee ownership trust can as well. The employee ownership trust also keeps decision making and ownership control locally because the workers generally control the trust and the decisions that the trust makes.

Jon Mertz:          14:18          What triggers business leaders to take the step towards employee ownership?

Loren Rodgers:      14:21          Succession is, by far, the number-one motivator for companies becoming employee-owned. People don’t like the idea of a third-party vendor taking over the business that’s their legacy.

Loren Rodgers:      14:36          The other trigger for companies becoming employee-owned is for business owners who are not planning to leave their business. There, there’s a collection of things that motivate them to put employee ownership in place. Sometimes they’re really looking for a tool to recruit and retain people, and they want people who will feel a high degree of stewardship, a high degree of alignment with the company. They think one way to do that, which it’s true, is to make sure that those people have a chance to own the business.

Loren Rodgers:      15:16          I talk to a lot of HR people in our member companies, and they say that, when they’re doing job interviews and they bring up the idea of employee ownership, they can see, from people’s reactions, whether they’ll be a good fit for the company. Some people just immediately latch onto the idea and think employee ownership is a great idea. They love the idea of being responsible for the business, having a level of confidence and stewardship placed in them.

Loren Rodgers:      15:45          They understand that, by coming to this business, they’re accepting a higher degree of responsibility for their own financial future and that they’ll be part of a community of people that’s working together to collectively build their own financial future. There are a bunch of businesses whose owners just philosophically believe that it’s the right thing to do for employees to have a share in the wealth that they help create. They simply feel better about their business and about themselves when they’ve taken some steps to share the wealth that the business creates.

Jon Mertz:          16:24          Do you see more employee engagement in employee-owned businesses?

Loren Rodgers:      16:27          I’ll admit that the best study on that is a bit long in the tooth right now, but based on the conversations with our members based on the people who come to our conference and the sessions they go to, a lot of employee-owned companies fit into one of two patterns. One is where they put, let’s say, an ESOP into place because the owner is approaching retirement and it’s a purely financially-driven decision. Then, in maybe 5 years or 10 years, they suddenly realize that they’ve got all these people who are the owners and that they’ve got an untapped resource. Maybe they talk with a peer organization, maybe they come to our conference or go to one of our webinars, but they suddenly realize that they’ve got this engine that could drive the company to be more creative, to innovate new ideas, to go the extra mile. They decide, after they’ve put these up in place, that they really want to chase that down and harness some of the power of employee ownership.

Loren Rodgers:      17:35          The second model that we often see among our members is there are companies that are owned by a person and that person is, let’s say, very open with the financials and does a lot to coach employees about how to understand the business and what makes it work and develops a high level of engagement and participation and innovation. Maybe they’ve even got a broad-based strategic planning process or team hiring or something like that. They’re already acting employee-owned, and then the business owner realizes that having people act employee-owned without actually being employee-owned is… Isn’t it deceptive? She or he may then use that employee ownership as a way to reinforce and reward a culture that the company has already built.

Jon Mertz:          18:24          What are some best practices in terms of governance and transparency?

Loren Rodgers:      18:29          There are several realms, I’d say, of best practices. One of the pleasures of my professional life is seeing how different they are, different member companies do it. There’s certainly no template that fits all of them, but there are some common themes.

Loren Rodgers:      18:47          One of them is something I mentioned, the open-book management that a lot of our most successful member companies have really thoughtfully gone out of their way to train everybody at their business how to read a financial statement and how each person in the business affects that financial statement. Many of them also often take the next step and give people a bit of an education in how the financial statements, in turn, affect the appraisal process and the value of the shares that are in their employee-ownership accounts.

Loren Rodgers:      19:21          That gives people a line of sight for what they do every day from their quality, from their speed, from their new business found. Anything they do as part of their other job is in a line of sight from that to the value of the stock that’s in their account. I think that kind of business literacy and open-book management is an essential piece of making employee ownership work well.

Loren Rodgers:      19:47          Another thing that we’ve seen companies do is really be bold in looking for ideas and engagement from the workforce. One of our member companies is W.L. Gore, the company that makes GORE-TEX. They’ve created these self-managing teams that kind of assemble around a project and then dissipate when the project is over, so it allows them to be incredibly flexible. If somebody has an idea for a project, she or he may post it and, if people join, then there’s a project. If nobody joins, then there’s no project, so it’s a sort of a full-on democracy. It works a little bit like a less-structured version of Holacracy.

Loren Rodgers:      20:31          We also have number of member companies that are very thoughtful about getting everybody involved in the hiring process, for example. We’ve got companies that create innovation structured so that, periodically, they gather everybody or a subset of the workforce and have them just step back and look at their work process and look for ways to improve it.

Loren Rodgers:      20:54          I think open-book management is one. Engaging people in how the business works is another. There are all sorts of best practices, depending on the form of employee ownership, that go along with just dotting all the Is and crossing all the Ts in terms of getting the legal documentation right, making sure the governance is as it should be, that everybody has clear roles, that the board is holding the company responsible for meeting all of its strategic plan goals and coming up with an appropriate strategic plan in the first place.

Jon Mertz:          21:30          Do you see more community engagement in employee-owned businesses compared to other models?

Loren Rodgers:      21:36          I wish I had some outside verifiable data on that, and I don’t, but I do know that, whenever we talk about this at our conferences, we do have a lot of our member companies say, “Yeah, we’ve got a charitable program where everybody gets some number of days where they can contribute community service.”

Loren Rodgers:      21:55          We have other members that have set up their own captive foundations, so employees contribute some amount, possibly even as a payroll deduction, to a foundation, and then the employees collectively have a role in deciding how that foundation is going to spend its money to support the community. One example of that is a company called Torch Technologies. They’ve built up a foundation called Torch Helps, which has done a great job of reaching out to its community in Huntsville.

Loren Rodgers:      22:24          We also have a number of companies that have gone beyond the call of duty when there is a disaster or some event going on in their community. Oliver’s Market here in our neck of the woods in northern California is a small set of grocery stores. When the fires in wine country happened, they went out of their way to keep people on payroll even if they weren’t able to come to work. They went out of their way to open up their stores and provide relief for people who were homeless and had lost all their possessions. Another company, Acadian Ambulance, was centrally involved. They were one of the most competent organizations involved in the rescue of people after Hurricane Katrina. There are a lot of employee-owned companies that really do take active steps to support their communities.

Jon Mertz:          23:14          In general, what are some of the key leadership traits that help an employee-owned business succeed?

Loren Rodgers:      23:19          I think that’s a great question, Jon. I think that some of the key traits that make leadership work, well, one I’d say is humility. We’ve seen a number of our most successful companies have CEOs who are good listeners. They’re probing in their questions. They’re very careful to not have their opinions color what happens in the company until they’ve had a chance to have everybody here, everybody else share their ideas. I think humility is a big one.

Loren Rodgers:      23:57          I think another thing that makes employee ownership successful among leaders is a really thoughtful combination of risk taking and conservativism. We see, among company leaders, that they’ve done some really bold things. We’ve seen people create whole new lines of business that didn’t exist before. We’ve seen them be very nimble to jump on some of these business opportunities. We’ve also found them to be very careful. Employee-owned companies may not borrow as much as other businesses. They may do other things that show a high degree of care about the health of their businesses.

Loren Rodgers:      24:44          I’d say the humility, which leads to an ability to be creative, collectively creative, and balancing risk taking with conservativism are two characteristics.

Jon Mertz:          24:57          To wrap up, for those looking at the employee-owned business model, what’s a good place to start?

Loren Rodgers:      25:03          I’ll immodestly say that one great place to start is our website, which is nceo.org. We’ve got a bunch of resources there that are aimed at helping people make those early decisions about whether an employee ownership plan is a potential fit for them and, if so, what their next steps might be and what form of employee ownership might be the next best step.

Loren Rodgers:      25:30          There’s another organization I’ll mention called the Democracy at Work Institute. They’re an unparalleled organization to help people who are sure of it already that, if they do employee ownership, it’ll be as a worker cooperative. They specialize in co-ops. They are tough to beat.

Loren Rodgers:      25:46          I think those are the two places I would recommend starting for people who are interested in supporting, in looking at employee ownership. If any your listeners are interested, we are always happy to talk to people. Give us a call here at the NCEO, and we’ll talk things through.

Jon Mertz:          26:05          Well, this has been fascinating. It’s exciting to see that employee ownership is gaining more interest, and I’m sure that has a lot to do with you and your team’s work.

Loren Rodgers:      26:13          Thank you so much, Jon, for the chance to speak with you. I really enjoyed the conversation.

Jon Mertz:          26:25          Activators, let’s continue the conversation in our Activate World LinkedIn group. We look forward to hearing your thoughts and perspectives.

Be sure to tell your friends and colleagues about the Activate World podcast. Encourage them to subscribe, listen, and share from their favorite podcast platform, AppleGoogleSpotifyiHeartRadio,  RadioPublic, and others. Let us know how we’re doing by leaving a review. Your reviews mean a lot to us.

Special thanks to Kaela Waldstein and Kent Nutt. Music by Jason Goodyear. For Activate World, I’m Jon Mertz.

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