Employee ownership is a part of stakeholder capitalism. Here’s the case for it as a tool to lessen the racial wealth gap

We’re in the era of stakeholder capitalism.

Thinking has shifted about companies’ responsibilities to society. Now, it’s more generally believed, a company owes more to those affected by its work — customers, employees, suppliers, communities — than to its shareholders. Accordingly, employee ownership is emerging as part of the discussion on fulfilling those responsibilities.

Employee stock ownership plans, or ESOPs, are touted as a way to boost workers’ wealth by providing them with ownership stakes in the businesses they work for. It’s most common in the manufacturing industry, with science and technology services behind it, making up 19% of the approximately 6,500 ESOPs in the U.S., per the National Center for Employee Ownership.

Business ownership a racial equity issue, too: Especially for employees of marginalized and underrepresented backgrounds, this model provides equity to those who might not typically receive it, potentially leading to increased generational wealth and more stable communities in the process. Black and Latinx people represent 44% and 15% of Philadelphia’s population, respectively, but own only 6% and 4% of employer firms in the city, plus 30% and 13% of non-employer firms.

Philadelphia City Council member Derek Green is a proponent for the adoption of ESOPs in local businesses. It could have an outsized effect in Philadelphia, which he noted has the highest poverty rate of the 10 biggest cities in the U.S.

“Wealth is created by owning a company or a piece of company,” he said during a recent ImpactPHL panel about the advantages of ESOPs. “Finding ways to provide that path to employees of companies is a path to addressing some of those systemic issues. People are not as familiar with some of those opportunities.”

Wealth is created by owning a company or a piece of company.

After a long career in business, Bill Stockwell said, he considered his options as he approached his golden years. As the chairman and CTO of Stockwell Elastomerics, a Northeast Philadelphia-based manufacturing company that started with the work of his grandfather in 1919, he realized he wanted to preserve his family business’s legacy — especially the way it integrated community members in its work.

Selling part of his business to his employees did that, he said.

“Guys like me have a devil on their shoulder with private equity, but what would happen if I sold?” he asked rhetorically. “New ownership probably wouldn’t care about the specialty markets we serve, move us out of Philly, and 10 to 30 year employees with high school degrees and highly specialized skills are suddenly out on street unemployed.”

Stockwell Elastomerics now has 90 business owners.

So, how does it work?

Todd Leverette is partner at D.C.’s Apis & Heritage Capital Partners, where he uses financial management skills he honed working with corporations to inform the decisions of smaller companies and sole proprietors. According to Leverette, ESOPs are like 401k plans for employees — but with more benefits.

ESOPs are like 401k plans for employees — but with more benefits.

“In essence, it’s a 401K plan that invests in stock of one company,” he said. “The benefits of a 401K plan goes to the workers and is transferred to workers via a trust. An employee stock ownership trust is a tax deferred entity that holds the shares or entity primarily through appreciation through value of company. Share value of that company goes up. When workers exit, they can put their stock back in company and get it paid back over time.”

For many small businesses with just a few employees, succession as a means of continuing their momentum across generations is almost nonexistent. ESOPs could be a means of preserving succession for firms, with more business owners as their result.

“For business owners that are Black and brown and have a number of employees, they’re busy running it every day,” Leverette said. “They may not have relatives and are in a quandary. This is an issue for a number of businesses and there is a little bit of procrastination. The only retirement options I hear about are the traditional types of options. It’s why conversations and education are important.”

Even with extensive experience in his field, Leverette said that he only learned about ESOPs when he started working with a nonprofit much later in his career. He quickly realized that if he barely knew about them as an expert in his field, the public was likely far behind. More awareness is needed for ESOP adoption to take off.

Public officials can help raise awareness for ESOPs, and Green affirmed that elected officials like himself can do more to advocate for ESOPs in their respective municipalities.

“We need to push policymakers like myself at the local, state and national levels to advocate for ESOPs, Green said. “Once they get an understanding that is a way to preserve and grow businesses in your communities, I think it’s going to awaken people to this opportunity and strengthen Black and brown businesses in our community.”

Read an explainer on ESOP structure and impact Michael Butler is a 2020-2022 corps member for Report for America, an initiative of The Groundtruth Project that pairs young journalists with local newsrooms. This position is supported by the Lenfest Institute for Journalism.