To “Build Back Better,” Canada Needs More Employee Ownership

In the US and the UK, employee ownership trusts have led to more employee wealth, stronger companies, increased economic resilience and better succession for business owners.

Canada doesn’t have them.

Today, we're launching a campaign to bring employee ownership trusts to Canada.

“After two significant economic crises in the last dozen years, the word on everyone’s lips is “resilience.” How do you create a resilient economy, capable of weathering storms and meeting the challenges and opportunities posed by globalization, urbanization, and technological change? One tool that has been proven over several decades to build more economic resilience is employee ownership.”

These are the opening lines of our new report "Building an Employee Ownership Economy" We produced this report because in order to “build back better,” we need real actions that are proven to support a resilient economy. Bipartisan support for employee ownership in the United States has led to about 6,400 employee-owned companies, where 14 million workers share in $1.4 trillion in wealth. Yep, trillion. With a T. And since the UK introduced more support in 2014 employee ownership has taken off. 

In contrast, Canada has very little employee ownership because the necessary tools and incentives do not exist.

Employee ownership is just smart, evidence-based public policy. And enabling it is something Canadian governments can do today that will help make “building back better” real.

To understand the opportunity employee ownership presents, it’s important to understand the surprising public policy success story that is the US-ESOP.

US-style employee ownership is a game changer

We know, we know. It’s a bit tough to talk about the US right now. Everything seems a bit…poisoned. But the success of American employee ownership is impossible to deny. US-style Employee Stock Ownership Plans (US-ESOPs) are a form of employee ownership trust that enables business owners to sell shares to their workers at fair market value, funded by debt, and at no cost to employees. They are broad-based, requiring shares to be distributed to almost all employees, and not just top management. Since they were established in 1974 a bi-partisan consensus has provided more and more incentives to promote their use. Well-known companies, such as Publix, Gore (makers of Gore-tex) and Clif Bar have significant employee ownership.

One of the great things about US-ESOPs is they’ve been around a long time and have been well studied. It turns out they grow faster, are more profitable, are more resilient in downturns, stay in their communities longer and pay their employees more before you take into account their share ownership. And when you do include their share ownership, US-ESOPs have proven to be a powerful wealth creating engine for many workers who otherwise have no access to ownership. According to one study, employee-owners have 92% more wealth than equivalent employees at other companies and many front-line US employees have retired with $1M+ payouts.

They’re also a terrific succession option for business owners, which is crucial at a time where a majority of owners of private companies in the US and Canada are approaching retirement. Selling to a US-ESOP allows owners to protect the legacies they’ve built, preserve jobs in their local communities where they will continue to live, reward their employees and receive a fair return for their companies. So many wins!

Employee ownership continues to be seen as an important public policy tool in the US today. As that country grapples with recovery from COVID-19, there is both a Republican and Democratic bill before congress calling for additional incentives so US-ESOPs can support building back better in America.

But the US isn’t the only country with an employee ownership trust success story.

Employee Ownership Trusts in the UK

Until recently, employee benefit trusts were legal in the UK but faced tax hurdles and had few direct incentives to encourage their uptake. Early in the 2010s, the coalition government commissioned an outside review led by tax lawyer Graeme Nuttall on how to promote greater employee ownership, with a focus on improving business performance, innovation, and economic resilience. Sharing success, Nuttall’s excellently named report, was published in 2012 and led to a new streamlined employee ownership structure called the Employee Ownership Trust in 2014, and a series of incentives to encourage their use. On a recent call Graeme told us that the current pace of EOT transitions was 100 a year, higher on a proportional basis than the current pace of US-ESOPs. Over 60% of EOTs in the UK as of June 2019 had converted since the new rules in 2014.

A “made-in-Canada” approach to employee ownership

Employee ownership trusts provide four clear benefits:

1. Increased economic resilience, in the midst of our third economic crisis in the last 20 years
2. Improved business succession, at a time when the majority of Canadian business owners are within 10 years of retirement
3. Protection for local, regional jobs in an era of corporate consolidation and globalization
4. Increased employee wealth in the face of ever-growing inequality

If you’re looking to build back better, what more could you possibly want? But these benefits are impossible to achieve in Canada today, as we lack both employee ownership trusts and the incentives to support them.

The good news is that when supportive public policy was introduced in the US and the UK, it was followed in both cases by significant growth in employee-owned firms. Conditions in Canada are ripe for the same kind of growth — as long as we get the barriers out of the way. That means we need an “off-the-shelf” legal structure for companies to work with, targeted tax incentives, and effective oversight that protects employees’ interests. This doesn’t mean our approach needs to be the same – a “made-in-Canada” solution could take the best of the US and UK approaches and design a structure best suited to our unique needs.

There’s no reason for this to be a partisan issue. In the US it’s difficult to find anyone that’s against employee ownership. In a minority parliament, supporting employee ownership coming out of COVID-19 can be an opportunity for all parties to work together for the benefit of all Canadians. 

It’s time to build an employee ownership economy in Canada.

As we embark on our campaign, please sign up for our newsletter, visit our website, follow us on twitter and download our report. And if you know of anyone in a position of influence that would be supportive of employee ownership, please forward them this information or reach out to us directly.

Social Capital Partners is a Canadian non-profit working to build a more resilient economy through broad-based ownership and quality employment. Jon Shell is Managing Director at Social Capital Partners.