Employee ownership trusts: key to an inclusive economy

"When employees have a chance to participate financially in the growth of their companies, everyone benefits."—Social Capital Partners

At Social Capital Partners, Bill Young and Jon Shell spend a lot of their days thinking about how build a more inclusive economy.

In their new discussion paper, Building an Employee Ownership Economy, they look at how other jurisdictions make it easier to invest in employee-owned enterprises.

They note that in the U.S., 14 million American workers at 6,660 companies share $1.4 trillion (U.S.) in wealth. Comparatively, they say Canada has a low rate of employee ownership. Why?

"The lower rate of employee ownership in Canada is not explained by culture or economic conditions, but by public policy," the discussion paper states.

"The most common form of employee ownership elsewhere—employee ownership trusts—is missing in Canada. These trusts, which include Employee Stock Ownership Plans in the U.S. and Employee Ownership Trusts in the UK provide a purpose-built vehicle to transition ownership of successful businesses to their employees."

How does it work? The models in the U.S. and UK differ, but essentially, employee ownership trusts provide employees with indirect ownership as beneficiaries of a trust:

1. Set up an employee trust fund that holds company shares for the employees;

2. The trust then secures a loan to purchase shares (the loan is ultimately paid off by company profits);

3. The trust buys some or all of the shares from the company's owner (the owner can leave, retire, or stay on);

4. Employees receive benefits of the shares in an equitably distributed manner.

In order to make this happen in Canada, Social Capital Partners say Canada needs a regulatory framework with a set of incentives. They call for:

• A clear structure and rulebook for employee ownership trusts;

• Targeted incentives that put employee ownership on an equitable playing field with alternatives and recognize the benefits to the economy of employee-owned companies;

• Effective oversight that ensures the interests of employees, shareholders, and the public are protected.

The report states: "There is a large body of research from around the world that points to employee ownership trusts as a powerful tool to 1) reduce wealth inequality, 2) support business succession, 3) protect local jobs, and 4) promote economic resilience."

Trish Hennessy is director of Think Upstream.

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Read the full discussion paper here.