PowerPoint Presentation - Ohio Employee Ownership Center.ppt

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					Employee Ownership & Economic Sustainability
  Competitiveness, Inclusion, and Wealth Creation

                             John Logue
                  Professor, Kent State University
            Director, Ohio Employee Ownership Center

                113 McGilvrey Hall         telephone: 330-672-3028
                Kent State University      fax: 330-672-4063
                Kent, Ohio 44240           email:

   Prepared for the External Advisory Committee on Cities and Communities,
                        Theme: Economic Sustainability
                               April 18-19, 2005

          Ohio Employee Ownership Center
I. The Landscape of Employee Ownership
           in the US and Ohio

     Ohio Employee Ownership Center
  Forms of employee ownership
1) Employee Stock Ownership Plans (ESOPs)
   Tax advantaged retirement plans for employees
   Invest primarily or exclusively in the stock of the
   employing company
   Can borrow money
   Must include at least 80% of permanent, full time
   employees (unless union opts out)

Consequently ESOPs are excellent tools for employees to buy
   companies and encourage broad ownership

        Ohio Employee Ownership Center
 Forms of employee ownership
2) 401(k) savings plans holding company stock
  • Frequently used in public companies
  • The Enron problem

3) Broadly distributed stock options
  • Public companies: contingent compensation for
    employees rather than long term ownership
  • Closely held companies: Must be coupled with internal

      Ohio Employee Ownership Center
 Forms of employee ownership
4) Direct employee stock purchase plans
   • No tax advantages
   • Sense of direct ownership
Some companies use ESOPs, options and direct purchase

5) Cooperatives
   •   Fewer tax advantages
   •   Fairly flexible
   •   Most advantageous in smaller companies
   •   “Born democratic” – members control the co-op
        Ohio Employee Ownership Center
The employee-owned sector in the US today
  Type of ownership           Companies            Employee-      Employee Equity
ESOPs                            11,000            8.8 million      $400 billion

Broad-based                      4,000            8-10 million    “several hundred
stock options                                                          billion”

401(k) Savings plans          2,200 plans          11 million       $160 billion
holding company stock
Stock purchase plans             4,000            15.7 million     no estimate on
Worker Cooperatives         Several hundred      perhaps 10,000    no estimate on
                                                   employees            value

                Ohio Employee Ownership Center
    Employee ownership in Ohio
Context: Ohio is
  industrial state
  with population of
  11.5 million and
  employment is 5.4
  million – about a
  third the
  population and
  labor force of

         Ohio Employee Ownership Center
       Employee ownership in Ohio
In Ohio there are about 425 partially or wholly employee-owned
companies with about 410,000 employee owners
   • Median employment:                              110-120 employees
   • Median sales:                                   $15 million
   • Closely held:                                   85%
   • Majority employee owned:                        ca. 35%
   • Full corporate governance rights
        for employees:                               42%
   • Non-managerial employees on board
        of directors:                                17%
   • Automatic disclosure of financial
       information:                                  48%
   • If no automatic disclosure (i.e., other 52%),
       financials are available on request:          57%

            Ohio Employee Ownership Center
   Growth of the Ohio Employee
         Owned Sector
                                              1993            2001

# of ESOP companies                            295            403

# of employee owners                        196,000         400,000

Value of employee equity                   $4.8 billion   $27.2 billion

Source: IRS Form 5500 filings, Larkspur Data Resources

          Ohio Employee Ownership Center
      Reasons for employee ownership in
       Ohio (multiple reasons possible)
•   ownership succession                              58%
•   divestiture of plants & divisions                 11%
•   averting shutdown or major job loss                5%
•   blocking a takeover or purchase by another company 6%
•   financing expansion of company                    10%
•   reducing borrowing costs                          15%
•   replacement of another benefit plan               10%
•   additional benefit plan                           35%
•   philosophical commitment to employee ownership    44%

          Ohio Employee Ownership Center
       Why ESOPs are used in
        ownership succession
• Tax reasons: Owners of closely held businesses who
  sell 30% or more of the shares in the business to
  employees through an ESOP or a co-op can avoid
  the tax on the capital gain
• Fair price: Employees pay an appraised “fair
  market value” for the business
• Philosophy: Many owners would prefer to sell to
  their employees
• Financing: ESOPs provide low-cost financing for
  employee purchase

        Ohio Employee Ownership Center
       Advantages of employee
       ownership in succession
• Employees buy and continue successful
  businesses – rather than their being sold to
• Purchase anchors jobs in community
• Continued local ownership maintains the
  higher local multiplier effect

       Ohio Employee Ownership Center
II. Employee ownership & competitiveness

    Ohio Employee Ownership Center
   Impact on company performance – 1

Employee ownership improves company performance
relative to pre-employee ownership performance

  Difference in Post-ESOP to Pre-ESOP Performance (2000)
  • Annual sales growth                     +2.4%
  • Annual employment growth                +2.3%
  Difference between ESOP and non-ESOP productivity
  • Productivity edge of ESOP firms         +6.2%
  Source: Douglas Kruse and Joseph Blasi, Rutgers University

           Ohio Employee Ownership Center
         Impact on company performance – 2
 Employee ownership + employee participation makes the difference
8                                                          Sales growth of
6                                                          participatory employee-
                                                           owned firms rose 7.2%
4                                                          faster than that of their
2                                                          competitors. Sales
                                                           growth of non-
0                                                          participatory employee-
-2                                                         owned firms lagged that
                                                           of their competitors by
-4                                                         4.3%. Baseline (0.0%)
-6                                                         equals sales growth of
          Participatory EO          Non Participatory EO   competitors.

                         Relative Growth

     Source: Jim Keogh and Peter Kardas, Washington State study

                Ohio Employee Ownership Center
           Impact on company performance – 3
Organizational development and change in profits relative to industry

    (percent of firms)

                         30                   24            23
                         10       3
                              No change    Added 1       Added 2        Added 3   Added 4 or 5
                               (N=29)      (N=42)        (N=31)         (N=20)      (N=25)

                                                     Better than industry

Increasing avenues for participation correlates with increased profits

                              Ohio Employee Ownership Center
Impact on on job retention & creation
      How Ohio ESOPs compared with their industries
              in job creation and retention

0     10          20           30          40       50   60

                       Worse than industry - 1%
                       Same as industry - 48%
                       Better than industry - 51%

    Ohio Employee Ownership Center
          Increasing employee influence
                             Source: Ohio study

                                            Percent using    Percent using
                                             technique         technique
                                            before ESOP     after the ESOP
Suggestion system                               53%              67%

Problem solving teams                           25%              52%

Self-managing work groups                       14%              26%

Non-managerial employees on Board                 0              17%
of Directors

           Ohio Employee Ownership Center
                     Impact of increasing employee influence
                          Non-managerial (NM) directors and firm performance

                     50                 44
                     40                                                              36
(percent of firms)

                               20                      18


                              Profits Better      Positive Quantitative Positive Qualitative
                                                         Impact                Impact
                                             No NM on Board     NM on Board

                               Ohio Employee Ownership Center
III. Employee ownership & inclusion

    Ohio Employee Ownership Center
    Impact on total employee compensation
1999 comparison of wages and benefits in matched ESOP and non-ESOP companies

                                                                ESOP          non-ESOP

  Average wage:                                                    $19.09          $17.00

  Median wage:                                                     $14.72          $13.58

  Average retirement assets

        ESOP                                                     $24,260                 0

        other plans                                                  7,953        $12,735

  Total retirement assets                                        $32,213          $12,735

 Source: Peter Kardas, Adria Scharf, and Jim Keogh, 1999 Washington State study

                Ohio Employee Ownership Center
           Impact on creation of wealth
                       Ohio wealth creation through ESOPs

                                                          1993      2001

Average equity per employee owner                        $24,500   $68,000

       without 3 top outliers                            $19,060   $40,000

Source: IRS Form 5500 filings, Larkspur Data Resources

            Ohio Employee Ownership Center
   Cost effectiveness of employee-
    ownership support agencies

• Over the last 10 years, the rate of ESOP
  growth in Ohio has been more than twice
  that of the US as a whole
• Ohio employee-owned sector also
  appears to be more democratic and more
• Why? Role of Ohio Employee
  Ownership Center

     Ohio Employee Ownership Center
        Impact indicators for OEOC,
• Worked with 485 companies employing 93,000 to
  explore employee ownership
• Assisted employees in buying part or all of 71
  companies, creating 14,000 new employee owners
• Cost in state funds per job retained or stabilized has
  been about $250/job
• These companies created $300 million in equity for
  employee owners by 2001
• We estimate that this employee equity position
  grows by $20 million annually despite retirees
  taking out about $10 million annually
        Ohio Employee Ownership Center
IV. Employee Ownership and the

  Ohio Employee Ownership Center
                      Impact on community life
                      1 .2 0

                      1 .0 0                  Co-operative town better

                      0 .8 0

                      0 .6 0
of two Italian        0 .4 0

communities           0 .2 0

in Emilia             0 .0 0
                               C      C        C          E            E            E         H   S     S
Romagna              -0 .2 0   1      3        5          2            4            6         2   E     P
                     -0 .4 0
                                                      C o -o p e r a tiv e to w n w o r s e

Source:             The graph above shows standardized differences on the following measures:
David Erdal,        Crime: victimization (C1), policing (C2), confidence (C3), feeling of security (C4), do-
                    mestic violence (C5)
1999                Education: level attained (E1), age leaving school (E2), truancy (E3), expected truancy
                    (E4), post-school training (E5), perceived importance of education (E6)
                    Health: physical health (H1), emotional health (H2)
                    Social Environment: perceived gap between rich and poor (SE1), helpfulness of authori-
                    ties (SE2), supportiveness of social networks (SE3)
                    Social Participation: membership of clubs (SP)

                 Ohio Employee Ownership Center
         Employee ownership and
          community economics
Impact on local economy
• Anchors capital locally
• Increases rate of reinvestment
• Higher local multiplier effect
Impact on families
• Increases job security
• Builds family assets
Impact on community
• Stabilizes tax base and community economics

       Ohio Employee Ownership Center
   Employee ownership and the
        employee owner
Employee ownership provides an additional
      pension & financial return
Participatory employee ownership also provides
  • greater job-level influence
  • some additional opportunities for training
  • more insight into the business
  • profit sharing in good times
  • more job security in bad times

    Ohio Employee Ownership Center
      Community competitiveness
Sustainable community economies rest on
• Competitive firms
• Good wages and benefits
• Anchored capital and jobs
• Broad ownership of productive assets & asset
• High local multipliers
Remember: There is no productivity in an
  unemployment line

      Ohio Employee Ownership Center

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