FIVE BIPARTISAN POLICIES TO EXPAND WORKER & STAKEHOLDER OWNERSHIP
As we stand on the precipice of a new administration taking control in the 2021, we’re taking a moment to imagine how State and Federal policy changes could be implemented to accelerate wider adoption of alternative ownership and investment forms. In this post we outline five specific public policies we’d like our representatives to consider.
While the movement to reform corporate governance is gaining momentum on the Democratic side, with leadership from the likes of Elizabeth Warren (D-Mass.), Tammy Duckworth (D-Wisc.), Tom Carper (D-Del.) and Mark Warner (D-Va.), the movement to reform ownership has not received similar attention. And if you read our blog posts, you’ll know that we strongly believe that ownership and finance matters.
So, in the spirit of “hold the vision, trust the process,” here’s the change we’d like to see coming out of Washington and our State Capitals in the New Year.
Promoting Employee Ownership Alternatives (Beyond ESOP)
According to the American Sustainable Business Council, twenty-eight million Americans belong to 7,000 employee stock ownership plans (ESOPs), an ownership form that was created as part of the 1974 Employee Retirement Investment Security Act, or ERISA as it is more commonly known. A major contributing factor that ushered in the growth has been the government’s use of targeted financial incentives for business owners and companies that have enjoyed bipartisan support in Congress for the last 40 years.
US legislation to date has favored ESOPs above all others. In our ideal future state, policy makers would begin to treat all broad-based employee ownership forms as desirable and deserving of similar support to encourage wide-spread adoption and business longevity. The following are areas of focus where we’d like to see parity:
Incentives for Owners and Companies
Owners selling all or part of their business to an ESOP receive a significant tax benefit: they can defer and potentially eliminate their capital gains tax. No such incentive is available to owners transitioning their business to an Employee Ownership Trust (EOT), a purpose trust that focuses on employees as beneficiaries of the purpose. Congress should remedy this situation by permitting capital gains tax deferrals to EOTs under IRC 1042.
Once established, companies operating with an employee stock ownership plan also accrue significant tax benefits. All company contributions to ESOPs are tax deductible, and small businesses are fully exempt from income tax if they are 100% employee owned. What if these same incentives were available to companies owned by an Employee Ownership Trust? And what if Worker Cooperatives had a similar corporate income tax exemption? Might we see wider adoption of broad-based employee ownership if all were treated equally, and founders/owners could choose the ownership structure that best fit their mission, vision, culture and business strategy? Congress should take action to level the playing field by qualifying EOTs as tax-exempt trusts, which would grant EOT companies treatment equivalent to that of ESOP S corporations under IRC 501(a).
In their recent white paper, “Creating an Economic System that Works for All,” the ASBC offers a comprehensive list of public policy initiatives to address challenges such as income inequality, crumbling infrastructure, market consolidation and climate change. We were buoyed to see that their policy recommendations include advocating for tax policy parity with ESOPS for “hybrid and diverse ownership models including worker and union cooperatives, as well as other emerging, hybrid shared ownership structures under federal law” so that “hosting communities and their emerging worker-owners can choose the model and approach best for them.”
Beyond federal measures, we should also be incentivizing employee ownership at the state levels. Recent attempts include a bill in New York that would provide a capital gains tax exemption for ownership transitions that result in majority employee ownership (covering both EOTs and ESOPs); in Wisconsin that would provide an array of tax incentives for EOTs, ESOPs and other forms of employee ownership, and most recently in Maryland, that would modify the state code to extend the tax deductibility of contributions to ESOP plans to include EOTs and Direct Share Ownership Plans.
Incentives for Capital Providers
In the early days after ESOPs were established, lenders were given the ability to deduct 50% of the interest income they earned on loans to ESOPs from their federal tax. Eventually this incentive was removed after the marketplace for financing these transitions had matured, but there’s no question that it was a significant driver in the rapid adoption of ESOPs. A similar effort could be applied to financing mechanisms used to fund EOTs and cooperatives – both the ability to deduct a portion of interest income on loans and a portion of the dividends earned on equity investments.
Promoting Multi-Stakeholder Ownership
In addition to advocating for policies to incentivize the movement towards employee ownership, we’d also like to see states adopt legislation that would create an easier path for owners and companies to transition to Perpetual Purpose Trust (PPT) ownership.
To refresh your memory: EOTs are a single-stakeholder form of a PPT, where the all or some of the shares of the company are held on behalf of all or some of the employees. PPTs, however, can be designed to incorporate multiple stakeholders (beyond employees) into governance and economic rewards.
In order to achieve perpetual independence and mission focus, as the name implies, a PPT must be established in a state where perpetuity is allowable. Currently, only 7 states enable non-charitable purpose trusts to be established to hold a business entity into perpetuity: Delaware, Maine, Nevada, New Hampshire, Oregon, South Dakota and Wyoming (nice to see a bipartisan cross-section of states at this moment in history!) This fact does not in itself create an absolute limitation on a company’s ability to enter trust ownership, but it does limit the jurisdiction within which the trust can be registered. And some owners and companies are disincentivized by the fact that their trust cannot be registered in the state in which they operate.
For example, when Organically Grown Company established the Sustainable Food and Agriculture Trust in 2018, there was no option to register it locally in their home state of Oregon. Instead, the company chose to incorporate the Trust in Delaware. To raise the profile of the benefits of trust ownership, and to make the process simpler for other companies in the community to follow their lead, they partnered with Professor Susan Gary of the University of Oregon and Representative Julie Fahey to advance legislation, in the form of the Oregon Stewardship Trust law which passed in 2019. Enacting similar legislation in additional states could raise awareness of the perpetual purpose trust ownership form in the legal and business community and lead to broader acceptance and adoption.
