Thinking globally, acting locally: 
Promoting employee ownership at the subnational level

Report on the COG Subnational Discussion Group

John Logue, Moderator

There are at least six reasons why we should be concerned with encouraging employee ownership at the subnational level: at the level of the state, the province, the region, the municipality, or other subnational governmental units or at the level of the industrial branch, cutting across governmental geographiunits. 

 

The first is that in many governmental systems, particularly federal systems, legislative measures beneath the national level may be effective in promoting broadened capital ownership.  In many federal systems, the writ of the federal governmental does not extend beyond broad national agenda items; state and local legislation speaks to the local economidevelopment questions. 

 

Second, in larger nation states, be they federal or unitary in structure, the national government is not a very effective provider of technical assistance for companies, employee groups, retiring owners, unions, or community economidevelopment groups.  Subnational provision of technical assistance through state, provincial, or municipal programs, or through non profits -- 501()(3)'s in the United States, and their equivalents elsewhere -- and industrial associations is far more efficient and appropriate. 

 

Third, employee ownership is, in its nature, not only a strategy for broadening capital ownership at the national level, but also a strategy for anchoring capital and jobs where employee owners live.  This localististrategy is best implemented through subnational action. 

 


Fourth, employee ownership is intrinsically a micro economistrategy, implemented at the level of the firm.  As we will discuss below, many of the opportunities available for employee-owned companies are available at the local level where the companies are situated and where their employees live.  These areas of activity include collaborative networks, training cooperatives, establishing employee-owned supplier networks, and other strategies for community involvement.  The substantial multiplier effect that employee-owned companies can have in spreading employee ownership and increasing community economiactivity takes place typically at the state or, more generally, municipal levels. 

 

Fifth, employee ownership tends to stabilize local and state economies by anchoring capital and jobs.  Moreover, its productivity enhancing effects Ahelp to narrow the divide between those who favor and those who fear more growth in Hawaii by slowing workforce/population growth in future economiexpansions which, in turn, could reduce the need for wage cuts and lay-offs in future recessions@ (Tom Brandt, 4/4/2000; see also his AImpossible Dream for Hawaii's Future? 9/10/99).[1]

 

Sixth, with economiglobalization, the nation state gradually ceases to be the appropriate unit for economipolicy, and the traditional national economimanagement tools -- whether fiscal, monetary, or exchange rate policies, capital transfer restrictions, domesticontent, requiring a controlling domestiownership stake, domestipreference in the award of publicontracts, et.-- cease to be effective or are struck down by international trade rules.  In this environment, employee ownership is a particularly attractive alternative, especially for high wage areas.

 

Thus, it makes sense to look at employee ownership at the subnational level as distinct from the  promotion of employee ownership nationally and from the promotion of employee ownership at the transnational level.  These levels impact promotion of employee ownership at the regional and local levels but that state and local implementation is also distinct from national action.[2]

 

The goals of the COG subnational discussion group and of this paper have been to canvass existing subnational initiatives, to select best practices worthy of dissemination, and to propose innovations in order to promote the expansion of employee ownership through subnational initiatives by both governmental units and other organizations, including both non-profits and for-profits.  Our overarching goal is to find mechanisms to expand the employee-owned sector that are within our scope of control.

 

We will look at what subnational actors -- both publiand private sector --  can do to promote employee ownership through (1) stae legislation, (2) technical assistance, (3) local actions, (4) investment funds, (5) company networks, and (6) using the economipower of employee-owned firms within their communities.

 


Participants in the discussion appear to have sought to achieve two major goals with their proposals: (1) broadening ownership of productive assets through increasing the rate of formation of employee-owned firms, and (2) deepening existing (or future) employee ownership through encouraging greater employee participation.

 

This paper concludes by looking at issues and problems raised in the subnational discussion and by enumerating measures which can be taken by subnational actors to broaden ownership of productive assets.

 

 

1. Subnational publipolicy

 

Subnational political units can act to encourage employee ownership within their jurisdictions.  From the subnational discussion on the COG website and during COG's annual meeting, that seems to date to have been done primarily in the United States and Canada.  There is, however, no particular reason why similar measures cannot be undertaken in other federal systems and in unitary political systems which give some latitude to subnational governmental bodies in economidevelopment.

 

Employee ownership hit the state policy agenda in the United States shortly after Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 which legitimized ESOPs as a pension plan.  In all, twenty-eight states have passed some sort of legislation encouraging employee ownership.  Such measures run the gamut from policy declarations to substantial financial commitments.  They include:

 

 


In the aftermath of ERISA, Minnesota and Michigan passed legislation supporting employee ownership in 1974.  The big push for state legislation was between 1979 and the end of the 1980s as the one-two punch of the recession of 1979-80 and the overvalued dollar in the middle of the decade sent manufacturing into a long-term crisis. While no more than two or three percent of employee-owned companies have been set up to avert job loss, much of state legislation in this period focused on employee ownership as a defensive, job retention strategy.  Between 1979 and 1990, twenty-three states passed legislation encouraging employee ownership in a variety of ways.  These included all the states in the industrial heartland from Massachusetts and Connecticut through Illinois and Wisconsin as well as the PacifiNorthwest.  By contrast, state legislation in the 1990s focused primarily on employee ownership in privatization (Virginia 1995; North Carolina 1998).[3] 

 

There is one notable exception.  In 2000, Maine, which had passed new legislation driven by job retention interest in 1997,  established a commission to undertake a comprehensive study of ownership patterns in the state. AThe commission is charged with recommending to the next legislature the specifieligibility criteria for accessing grants from the feasibility fund  and  which agency or organization should manage the outreach program....  The commission is charged with documenting current patterns of ownership of Maine businesses, the characteristics of those businesses (size, number and quality of jobs), and the impacts of changes of ownership on the state and local economies, and civiand environmental accountability.   One area of particular interest is the patterns of small Maine owned growth companies, particularly technology firms, and their need for large  infusions of capital as they grow:  how many are bought out, do they continue to operate in Maine, does their growth take place in Maine?   The commission will also look at policy options for broadening ownership through employee, consumer and community forms of ownership in firms operating in the state@ (Carla Dickstein, 4/4/2000; see also her discussion of 4/5/2000 and 4/7/2000 and ALR: 3751:  An Act To Broaden Business Ownership in Maine@ in the COG library). 

 

Maine's interest in keeping a high tech growth sector in local hands is similar to the perception in Manitoba that we will meet below in the discussion of the Crocus Fund.

 

Other initiatives proposed in the COG subnational discussion include:

 


 

 

Preferential bidding arrangements for government contracts

 

We have a variety of set asides in government contracting varying from state to state.  These include set asides based on ownership by minorities and women.  Why not set asides or preferences for employee-owned firms?

 

Carla Dickstein (email to Deb Olson, 4/18/2000) notes that both the French and Italian governments provided preferences to cooperatives in bidding on government contracts.

 

State and local privatization

 

With the hegemony of neo-liberal ideology reaching the local level in the 1990s, subnational governmental units joined nation states in divesting themselves of ownership of publiutilities and services, from hospitals through water works.  Since privatization is handled in a separate paper, suffice it to say here that subnational privatization of municipal and state enterprises has represented a major missed opportunity to broaden ownership in the West.  In general privatization has occurred through sale of locally owned publienterprises to conventionally owned corporations, not to employees, with revenues flowing into general coffers for current spending, rather than into trusts or other funds which provide a lasting benefit for citizens. 

 

In effect, the publisector has liquidated long-term assets to finance current consumption.  While this procedure has been justified by the unsubstantiated ideological assumption that private markets are always superior to publiprovision of goods and services, in fact much of the political motivation for local privatization has been covering revenue shortfalls or paying for tax cuts, usually for the well to do, quickly consuming the value of publiassets.  At least in the United States, this has been Afree@ funding for the governmental unit, because publisector accounting practices do not provide balance sheets to citizens charting asset liquidations.

 

Given the fact that these assets were typically built through publieffort, achieving some publipurpose (beyond raising funds) would seem desirable.  The Virginia and North Carolina legislation consider sale to employees as a means of privatization. Russian and Eastern European privatization at the local level on occasion has also given preference to employees, as did Mrs. Thatcher’s privatization of bus lines (carried out in the unitary United Kingdom through national governmental action).


As is clear from Dan Bell’s report on the discussion group on employee ownership in privatization, one primary motivation for an employee share has been getting publiemployee unions’ acquiescence in privatization.  However, one can conceive of a privatization policy designed to create lasting employee ownership of privatized assets.

 

Another interesting idea is to create partial employee ownership of some or most publienterprises by simply paying employees a small capital wage in stock, underpinning what otherwise would be purely theoretical ownership rights with dividends -- when the enterprise was profitable.

 

Distribution of subnational publiownership rights to citizens

 

The Alaska Permanent Fund constitutes a unique case in the United States of using publiownership rights of subsoil resources (in this case, oil) to convey quasi ownership rights to citizens.  Since 1982, a portion of state oil royalties have been distributed to every man, woman, and child resident in Alaska for all of the previous year.  Every resident who qualifies gets an equal share.  These rights are not tradeable (i.e., cannot be sold), cannot be inherited, and cannot be taken with you if you move out of Alaska.  In effect, Alaska treats its residents as beneficial owners of royalty rights.  In 2000, dividend checks from the Permanent Fund were almost $2000 for each of the state's 585,000 qualifying residents.  The state retains the formal ownership right but chooses to pass-through the economibenefit to its citizens.[4]

 

It is not difficult to imagine a similar treatment for other profitable publiownership rights at the state or local levels when those streams of income are sufficient to be divided.  Publiincome from royalties, easement and concession income, fees for private use of publiproperty, and the like are often consigned to general revenues and not as jealously protected as they might be if citizens derived a more direct benefit from publiownership.  Of course, most of these publiownership income rights are already committed to other worthy publiends, especially publieducation as is the case for Texas oil royalties and for most state lottery profits.

 

Is there any reason why profitable, publicly owned electrical utilities, parking garages, et., could not pay dividends to citizens?

 

Thinking more broadly, what Alaska has done is to conceive of ownership as a bundle of rights.  The right of ownership itself remains in the hands of the state, but the right to dividends  on that ownership is accorded to citizens.

 

 

 


2.  Providing technical assistance

 

One promising mechanism for encouraging employee ownership at the subnational level is the establishment of organizations which provide information, technical assistance, training, and the like for employees seeking to purchase companies or to establish cooperatives.  This can be done by governmental units (as has been done in several American states), by not-for-profits organizations (again there are several American examples), by unions, by labor-sponsored investment funds, or, conceivably, by for-profit groups.

 

State employee ownership programs

 

During the latter part of the 1980s and early 1990s, seven state employee ownership programs (Hawaii, Massachusetts, Michigan, New York, Ohio, Oregon, and Washington) were established.  A quasi-state entity -- the Steel Valley Authority -- provides similar services on a regional basis in Southwest Pennsylvania.  More than anything else, these programs focused on outreach and assistance to union locals in plants facing shutdown and to retiring owners who might be interested in selling their companies to their employees. 

 

A study of three of these programs -- New York, Ohio, and Washington -- in 1990-91 by the National Center for Employee Ownership found all of those studied to be efficacious in increasing the rates of ESOP formation in the states in question.[5] 

 

Practically all we know about the impact of employee ownership at the state level is a consequence of studies done by those state programs (Michigan, Ohio, and Washington[6]) or supported by them.[7]  In addition, a number of foreign scholars have reported on American state programs and their results.[8]


 

Despite the apparent success of these programs, their political support ebbed with improved economiconditions in the 1990s and party transitions in a number of state governments.  The consequence was the defunding of state employee ownership programs in Hawaii, Massachusetts, Michigan, New York, Oregon and Washington, although state personnel continued to provide support and technical assistance for employee ownership in Massachusetts, Michigan and Washington. 

 

Why were clearly successful programs dismantled?  They were largely anchored in state governments; only Ohio's and Oregon's were contracted out by those states to, respectively, a state university and a non-profit organization.  This made them susceptible to the slings and arrows of state politics, especially because several state programs had clear partisan backing at the time of their establishment.   Placement outside of state government was no panacea, however: while  the Ohio program has continued to grow despite reductions in state support, loss of state funding terminated the Oregon program.

 

Jim Houck, who ran the Michigan program while it existed and who continues to promote employee ownership in that state reflected in the COG discussion that Awhy many of the earlier state programs have disappeared probably relates to changes in priority in succeeding administrations and the loss of an employee ownership champion either in state government, the legislature or in the Governor's office of these respective states.   State programs are inevitably vulnerable and most have a somewhat limited life expectance.  There is always the temptation to try something new and programs are constantly being scrapped, merged with others and replaced by the latest fad incentive.@

                                

AEmployee ownership must compete with a lot of other program applications in government,@ says Houck.  AIt must constantly evolve its marketing appeal (attracting and retaining employees is a major concern to most all states in today's economy) and specifiapplications if it is to retain its support by state government officials@ (Houck, 3/27/2000).

 


One aspect of state programs is particularly important to note: most got their bang for the buck by targeting retiring owners to encourage them to sell their businesses to their employees when there was no heir eager to continue the family business.  For the seller, the employees constitute an often enthusiastibuyer that is willing to pay a market price for the company, rather than bottom fishing.  For the employees, buying the company averts uncertainty and avoids the dubious aims of outside owners.  Additionally, in the United States, special Federal tax incentives encourage the sale of closely held businesses to employees.[9] 

 

A number of subnational programs have this focus.   In the early 1990s, Hawaii's employee ownership program was funded to identify owners within 5 years of retirement and to let them know about the advantages of employee ownership (Tom Brandt 4/4/2000).  The New York state program actively promoted employee ownership in retiring ownership situations by funding preliminary feasibility studies.  The Ohio Employee Ownership Center, which always stressed outreach to retiring owners, has run a broader ownership and management succession planning program successfully since 1996 in the Cleveland area; between 1996 and spring 2001, 347 business owners from 276 area companies employing more than 25,000 participated in the program.[10]  Massachusetts recently funded a state-wide succession planning program patterned on the Ohio model.

 

This retiring owner focus pays off in broadening ownership.  A 1991 NCEO study of several state employee ownership programs found a startling impact on the rate of ESOP creation in closely held companies; in Ohio, for example, where the state program targeted small business, the rate of ESOP creation in closely held firms rose 45% faster than the national average.[11]

 

Have these state programs made a difference? The answer is overwhelmingly “yes!”  The question is how best to maintain them.  Michigan’s Houck argues that it is Avery important to have legislation which more or less permanently supports the establishment of some sort of government response encouraging employee ownership. Ideally, that legislation will also establish a modest funding level to support staff and program initiatives. It does not have to cost a lot of money.   From $100,000 to $200,000 annually will provide a substantial administrative effort.  Legislation will help a state to override inevitable political shifts@ (Houck, 3/27/2000).

                                

Non-profit employee ownership organizations

 


In addition to publisector employee ownership assistance organizations, there are a handful of regional not-for-profits which promote employee ownership in the United States.  These include the Industrial Cooperative Association (now ICA Group) in Boston, the Center for DemocratiSolutions in San Francisco, and the Southern Appalachian Center for Cooperative Ownership in North Carolina.[12]

 

A number of local non-profits have been set up to encourage employee ownership.  In Ohio alone there have been three: Commonwealth in Youngstown, Worker-Owned Network in Athens (now ACENet), and Jobs for People in Cincinnati.  Generally speaking the catchment area for such local organizations is simply too small for them to focus exclusively on employee ownership and, over time, they have come to broaden their scope to include such other admirable goals as low and middle income housing development (Common Wealth) and flexible manufacturing (ACENet).

 

Employee ownership as a tool for general economidevelopment organizations

 

A handful of general purpose economidevelopment organizations have developed special employee ownership competence.  These include Coastal Enterprises, a community development corporation in Maine; Social Action for a Just Economy (SAJE), a 501()(3) Hispanicommunity organization in Los Angeles; the Center for Community and Labor Research, a labor-related economidevelopment and research program in Chicago; and the Steel Valley Authority, a quasi-governmental economidevelopment agency established by a number of municipalities in the Pittsburgh area.

 

These organizations use employee ownership as one of their tools for economidevelopment.  While their regional catchment areas are not sufficient to focus on employee ownership alone, through their economidevelopment activities they screen enough firms that some individual firms are identified as appropriate candidates for employee ownership. 

 

Given the successful experience of these organizations in using employee ownership in their regions, it would be worthwhile to train additional economidevelopment organization personnel in the appropriate uses of employee ownership.

 

 

Industrial sector strategies

 


An alternative to the regional geographifocus of the previous organizations is a sectoral strategy.  Several organizations have undertaken to promote employee ownership nationally within particular economisectors.  These include Childspace Cooperative Development, a national cooperative daycare developer; Cooperative Homecare Training Institute, which seeks to replicate in other urban areas the outstanding success of Cooperative Home Care Associates in New York City; and the Industrial Cooperative Association's temporary service cooperative initiative.

 

The first two of these cases build off the success of single cooperative enterprises.  Childspace, a parent-teacher cooperative daycare program, originated in Philadelphia where it developed an enviable track record of providing high quality daycare services in a low income community.  Cooperative Home Care Associates (CHCA) in New York is an outstanding example of how a cooperatively organized and well led company can provide higher wages and benefits as well as ownership in a low income, female service sector branch.  In both cases, national replication projects have been funded by foundations.

 

The ICA's employee-owned temporary employment agency initiative similarly attempts to improve employee's economiconditions in what is usually a benefit-less service branch while also providing ownership.  It uses the strength of an existing employee ownership organization to seek to spread the model nationally.

 

All of these initiatives seek to improve economiconditions for low wage or contingent workers while improving services to children and the elderly.  As such, they have received foundation support.  To have large scale consequence, however, they need linkages to other large organizations with the purchasing power to take these attractive models to scale.

 

Private sector consultants

 

Private sector consultants specializing in employee ownership in the United States outnumber publiand non-profit staff by a factor of 25 - 50 : 1.  Indeed, the rapid growth of employee ownership in the United States stems from its promotion by private sector consultants who are paid on a fee-for-service basis for providing professional services.  This appears to be a substantially more lucrative area of endeavor in the United States than in other countries, possibly because of the fact that the most common form of employee ownership in the United States is the ESOP, a government-regulated pension plan. 

 

As a consequence, most of the outreach done to the business community to encourage the creation of more employee-owned companies is done by the professional community.  This has been successful in spreading ESOPs (but not cooperatives, which provide few fees for professionals) in the United States, but it is driven almost exclusively by the tax breaks provided by the Federal government.  A reduction in tax expenditures or in the regulations which encourage the professionalization of ESOP services would reduce the private consulting sector's interest in promoting ESOPs.

 

Moreover, because the tax breaks are equal for democratiand non-democratiESOPs, private sector consultants do less to promote democratiemployee ownership than is warranted by its performance.


Maximizing leverage

 

In the United States, Federal tax advantages are accorded to good, bad, and indifferent ESOPs alike.  In fact, in terms of the total dollars in tax expenditures, the bad and indifferent ESOPs -- those with little employee participation, communication, or training -- account for the lion's share of tax incentives.  An Ohio study found that the bottom two-fifths of firms in these areas accounted for just over 90 percent of the corporate tax expenditures for ESOPs in Ohio. By contrast, the roughly three-fifths of firms which provided more opportunity for employee owners in these areas got under 10 percent of the corporate tax dollars.[13]

 

Ironically, it is the latter category of companies that outperforms conventionally owned firms, not the former.

 

Although compelling for corporations, Federal tax incentives are expensive.  They probably exceeded $3 billion annually in the 1990s.  By contrast, publisector funding for all employee ownership support organizations did not exceed $2 million annually at any point in the 1990s.

 

A modest Federal program to provide matching funds for state and regional publiand non-profit sector employee ownership assistance programs would be highly cost effective in generating both more employee-owned companies and in improving their performance. Recipients might also include sectoral employee ownership assistance programs, such as the Steelworkers’ Worker Ownership Institute (which became a casualty of the steel crisis).  Only $5 million annually in Federal matching funds -- less than 2/10s of 1% of the tax expenditure for ESOPs would probably lead to the establishment of 20 to 30 state, regional and sectoral employee ownership programs that would effectively cover the country.

 

In addition to matching funds, a $1 million marketing budget annually to promote the idea of employee ownership nationally would be valuable (COG meeting, 4/2000).

 

 

Replicating the agricultural extension service for employee-owned companies

 

One of the most successful American innovations in economidevelopment is the Agricultural Extension Service.  For decades it has been transferring research results from the lab to the farm, bringing knowledge and technology to the family farm.  The Extension Service has helped keep American family farms competitive with corporate farming and promoted a continual process of intellectual renewal in agriculture.

 


Creating an employee ownership extension service could be done at the state level to supply a variety of technical and organizational development assistance to smaller firms without Federal support; once in place in a couple of states and successfully field-tested there, an employee-ownership extension service could be spread by Federal matching funds.

 

The Department of Agriculture’s new Rural Cooperative Development Program has put cooperative development specialists into nearly all states.  Their mandate includes aiding the establishment of worker cooperatives, but little has been done in its area to date.  This program, however, has substantial potential to expand employee ownership in small towns in rural areas as a means to stabilize their economibase.

 

While the preceding discussion is couched in terms of the United States, the same principles could easily be applied in other countries as well.

 

 

3.  Action at the local level

 

Why should we limit ourselves to actions by state, provincial, or regional governmental entities?  Once we move out of Washington and turn to state and local initiatives, the possibilities are legion.  Much can be done to encourage broader employee ownership by municipalities, by charitable and religious organizations, by unions and universities, and by employee-owned companies themselves.

 

Little has been done to promote employee ownership by local government outside of using local revolving loan funds to save jobs in employee buyouts.  This probably reflects a lack of imagination rather than a lack of ability.

 

Among the proposals which have come to our attention during the COG process are

 

 

 

Further, individual employee-owned firms can act to grow capital stakes for their employee owners by simple leverage strategies.  One interesting outgrowth of the discussion of opening the Federal Reserve's discount window for lending for employee ownership (which is clearly a national level issue, rather than a subnational one) was the proposal that ESOP firms borrow to purchase a diversified portfolio of securities held in the Aother securities@ portion of employee ESOP accounts (Dan Bell 4/6/2000).  Company securities already held by the ESOP can collateralize the loan. Annual company ESOP contributions can then be used to pay off the loan.  Portions of the portfolio of other securities can, from time to time, be sold to cover repurchase obligations.  While the leverage required for this strategy increases its risk, the diversification reduces risk.  (See also Michael Harrington 4/12/2000.)

 


ESOP companies can themselves become cornerstones of local employee ownership efforts by building networks of employee-owned suppliers.  They can serve as incubators for new employee-owned companies, providing an initial base market in addition to the physical space, telephone answering and  accounting services provided by other business incubators. Employee-owned companies can -- and should -- examine which of the goods and services they currently purchase externally can be better provided (in terms of quality and reliability as well as cost) by local employee-owned suppliers.  ESOP firms can also go beyond the individual enterprise to build cooperative networks, including export cooperatives and cooperatives providing services to ESOP firms. These possibilities will be explored in Section 6 below.

 

It would be useful to build coalitions at the state or regional level between traditional cooperatives (agricultural, rural electri, mutual insurance companies, credit unions, consumer co-ops, et.) and the growing employee-owned sector.  The Province of Quebeoffers a dramatidemonstration of the possibilities that such a critical mass could create.[14]  Substantial synergies are possible, including developing hybrid consumer-employee cooperatives.

 

 

4. Employee ownership funds

 

Should there be special financing institutions for employee ownership?

 

Opinion is divided.  Some feel that it is salutary for employee-owned firms to utilize the standard market financing sources: commercial banks, asset-based lenders, venture capital funds, and bond market.  Others argue for at least a partially separate financing stream for the employee-owned sector.

 

Over the years, a variety of publiand private financing mechanisms for the employee- owned sector have been launched with mixed success.  These include

 

 


Some of these funds do only debt financing while others provide a source of friendly equity financing as well.

 

 

Revolving loan funds with preference for employee ownership

 

There are several revolving loan fund which have a preference for employee ownership or are exclusively employee-ownership lenders. These include A New Beginning/ANB Fund in the Shenango Valley of Pennsylvania; Commonwealth Revolving Loan Fund in the Youngstown, Ohio, area; LEAF - the Industrial Cooperative Association's revolving loan fund in Boston; and Northcountry Cooperative Development Fund in Minnesota.  Some of these funds, like ANB and Commonwealth, are community-based and make loans only in a limited geographiarea.  Northcountry, the biggest of them, is a regional lender, covering the Great Plains and Midwest.  LEAF lends nationally. 

 

 

Specialized lenders nationally

 

Since the New Deal, the agricultural cooperative sector has been underpinned by specialized Federal lending institutions.  Similarly, the expansion of home ownership from a third of American families to two-thirds of American families since the New Deal has been fueled by Federal home-ownership financing institutions.  As described in the COG national paper, during the Carter administration, the National Cooperative Bank (NCB) was established as a specialty lender for housing, consumer, and worker cooperatives.  Privatized during the Reagan administration, the NCB has become a preferred lender for many worker-owned businesses because it is in itself a cooperative owned by its customers.

 

While the NCB and its Development Corporation (the soft-loan window) are more appropriately a subject for the national level paper, they have undertaken a policy of supporting regional cooperative lending funds, like the Northcountry Cooperative Development Fund.  These serve as regional intermediaries for the NCB, working hand-in-glove with local borrowers who are too small to be serviced efficiently from Washington. 

 

This model of decentralization is potentially very valuable both in employee ownership lending and employee ownership venture capital in the United States and elsewhere.

 

 

State employee ownership financing programs

 

Establishing special state credit facilities for employee ownership -- particularly to avert shutdowns -- was a relatively popular initiative in the 1980s as the one-two punch of the 1979-81 recession and the overvalued dollar in the mid 1980s clobbered American manufacturing. Few have been established since then. These credit facilities came in four primarily varieties:


 

 

A number of other states, including Ohio, used existing state lending programs to support employee buyouts.

 

The effectiveness of such programs varied.  Earmarked employee ownership lending funds have generally been rolled into other economidevelopment loan funds as small pots of money were either underutilized or overdrawn. (Jim Houck also notes that Michigan's threshold requirement of 75% employee ownership was too high to attract a sufficient number of borrowers [3/27/2000].) On the other hand, both below market interest rates and publisector lenders willingness to subordinate their loans to commercial lenders seems to have played a significant role in supporting employee purchases of troubled and/or divested plants and firms.  Loan guarantees -- which are very cheap for the publisector -- seem to have been underutilized.[15]

 

None of these programs, however, addressed the systematilack of friendly equity investment which has hampered the growth of the employee-owned sector.  There are exceptions, however.  New Hampshire and Maine have created publisector venture capital funds.  While the Maine fund has taken no equity positions in employee-owned companies (personal communication, John Burns, Finance Authority of Maine, 4/13/01), the New Hampshire Community Development Finance Authority has made two placements in cooperatives (personal communication, Robb Nichols, NHCDF). Other than this limited state effort and some near equity placements by revolving loan funds, equity has been left to private venture capital which sought a much higher rate of return than most employee-owned firms found pleasing.

 

 

 

 


Raising venture capital on Wall Street for ESOPs

 

Five national venture capital funds have been created in the United States that have special preference for employee ownership.[16]  The first was Minneapolis-based Churchill Capital's Churchill ESOP Capital Partners which raised $188 million in a private capital partnership in 1995 in cooperation with Houlihan Lokey, a law firm with special expertise in ESOP transactions.  It was designed to provide subordinate debt, preferred stock, and minority or majority equity stakes in mid-market companies in placement of $5 to $25 million in management-owned or employee-owned companies. Among its first eleven companies financed were four ESOP acquisitions and one recapitalization.

 

It is our understanding, however, that after the investment of this initial pool, Churchill decided against raising a second ESOP fund; the market was too limited.