A dragon entering the midst of the employee ownership field—that’s how Jim Bonham, head of the Employee Stock Ownership Plan (ESOP) Association, described the splashy April announcement of a new nonprofit, Ownership Works, which says it aims to create $20 billion in worker wealth through employee ownership over the next decade. Spearheaded by Pete Stavros of KKR, the nonprofit is a collaboration between 60 organizations, including private equity firms, philanthropic leaders, banks, pension funds, and worker advocates.
“This effort is about providing entry and mid-level workers with access to a wealth creation tool—equity ownership—without a trade-off for wages or other benefits,” said Stavros. “At scale, this movement has the potential to build billions of dollars of wealth for millions of working families.”
Bonham is not so sure. He describes the project, in an ESOP Association publication, as “a cheap way to diffuse heat” on the private equity field and “very dangerous for those already providing true employee ownership.” We too are skeptical, like many others we’ve spoken to who have worked years to expand worker ownership through Employee Stock Ownership Plans (ESOPs) and worker cooperatives.
“We Are a Movement,” the Ownership Works site boldly proclaims. But is this initiative joining the movement, or co-opting it?
Authentic employee ownership strategies, according to Diane Ives, program officer at the Kendeda Fund, “need to be firmly grounded in democratic decision-making, building employee voice and agency, and promoting shared prosperity.” These characteristics are most associated with worker cooperatives (of which there are about 650 in the U.S.), and the ESOP trusts at the nearly 6,000 privately held companies that typically hold 30% or more ownership, benefiting 2 million workers.
Worker co-ops and ESOPs offer long-term employee ownership—unlike the equity grants that Ownership Works envisions, which may last only three to five years. Workers at cooperatives own the entire business and vote for the board. At ESOPs, a trustee represents workers’ interests.
The difference between short-term equity and real employee ownership can be seen in the stories of Gibson Guitars, taken over by KKR in 2018, and Taylor Guitars, which transitioned to 100% employee ownership in 2021. At Gibson, KKR piled $250 million in new debt on the company, using $225 million of that for a special dividend to the private equity fund. At around the same time, it announced $7 million in profit sharing for Gibson’s estimated 800 employees, which is less than $9,000 each. KKR executives stand to profit massively more. In 2017, the last year for which data is publicly available, four KKR executives earned an average of $167 million each, making them four of the country’s 10 top earners in that year, according to Bloomberg.
At Taylor Guitars, by contrast, an ESOP trust, not a private equity fund, now controls the firm, which reported revenue of $122 million in 2019. Rather than a 5-year-time horizon, the buyout deal involved 10-year financing from a Canadian pension fund, which is enjoying stable returns suitable for its beneficiaries. Taylor is not hamstrung by excess debt. Once the loan is paid off, the firm’s 1,200 employees will own the firm free and clear and can enjoy potential financial upside over the long run.
Real employee ownership is about worker empowerment. Private equity, by contrast, is known for the damage it has done to workers. The 19 private equity funds partnering in the Ownership Works project—including KKR, Goldman Sachs, Warburg Pincus, and Apollo—are known for enriching the very wealthy while overleveraging some of America’s greatest brands, stripping companies of their assets, loading companies with debt, and leaving workers without jobs. Examples of over-leveraged companies forced into bankruptcy by private equity include Toys “R” Us, Hertz, Payless Shoes, and J.Crew.
“They’re doing what big capital does: take over a concept like employee ownership and make it their own in order to make more money,” said Ian MacFarlane, president of EA Engineering, a $140 million environmental engineering firm that is 100% employee owned and a B Corporation.
MacFarlane describes his company as “a living system.” He argues that private equity is applying rote rules for “profit maximizing,” what he calls “the easy button.” “It’s harder to manage for stakeholders, to balance different concerns, listen to multiple voices,” he says. Private equity’s decision-making, he continues, “would destroy our culture and ecological mission.”
Some workers can get a big bump from the Ownership Works model. In a deal announced this week, KKR sold C.H.I. Overhead Doors for $3 billion. The workers who received equity in the firm will each, on average, earn $175,000. That’s impressive. It’s also noteworthy that the payouts impact just 800 workers. On the other hand, at another KKR portfolio firm, BrightSpring Health, 50,000 workers are struggling to make ends meet on wages as low as $8 per hour.
Ownership Works is not creating companies truly owned by workers over the long term, with worker voice in governance. However well-meaning the Ownership Works project, it is at risk of becoming a new form of greenwashing—creating a few social benefits while driving massively more wealth to the wealthy.
No one we spoke to doubted the sincerity of Pete Stavros and his commitment to workers. The trouble is, with wealth inequality in our nation so stratospheric, the bits of wealth this project proposes throwing to workers simply exposes the ruthlessness of the whole private equity field.
The Ownership Works project says it will be setting standards for employee ownership, but thus far, a spokesperson says, the only requirement is that ownership be “broad, meaningful, and free to workers earning less than $100,000 annually.” Such standards do not put guardrails in place to ensure that these transactions are designed to optimally benefit workers and limit wealth extraction, as do the existing “Guidelines for Equitable Employee Ownership Transitions.” These guidelines, developed by The Democracy Collaborative, the Soros family office, and Open Society Foundations, in consultation with dozens of leaders in the field, were designed to become the standard for employee ownership finance.
If KKR and Ownership Works are interested in reducing inequality, they need to look at who is actually creating value and who should capture it. All the companies held by the 19 private equity firms should pay fair wages; offer meaningful, long-term employee ownership; and incorporate worker voice in governance, says Andrea Dehlendorf, executive director of United for Respect and a member of the Ownership Works Labor Advocacy Leadership Council. Her organization’s website emphasizes that more than 60% of retail job losses have been at firms owned by private equity and hedge funds. Dehlendorf believes that the pandemic has shifted the playing field and created an opening to press for greater reforms to benefit workers.
In addition to implementing Dehlendorf’s reforms, the funds should all exit some companies they hold to 100% worker ownership via ESOPs or worker cooperatives. They should also make these worker-owned companies B Corporations. That’s employee ownership at its best. It’s a model of next generation private enterprise.
Steps like these would mean Ownership Works is not about turbocharging capitalism, but about laying the path to a democratic economy—an economy where enduring ownership designs authentically serve the many, not just the few.
Marjorie Kelly is distinguished senior fellow at The Democracy Collaborative (TDC), coauthor with Ted Howard of The Making of a Democratic Economy. Karen Kahn is editor of TDC’s Employee Ownership News, where a series of commentaries on Ownership Works are being published. Employee Ownership News is continuing the conversation on Ownership Works and private equity’s role in employee ownership.