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Employee Ownership

New Belgium Brewing company was the John Lewis of America: a household brand with hundreds of employees and hundreds of millions in revenue – that just happened to be owned by workers. It had become the favourite example of employee ownership for Jessica Rose, a director of the US think tank the Democracy Collaborative and co-founder of Fifty by Fifty, an ambitious programme to create fifty million employee owners in the US by 2050, who frequently used the company in her conversations with other businesses who wanted to know – does employee ownership actually work?

It was a shock to Rose when she woke up one morning in December 2019 and discovered that New Belgium Brewing had been sold to a subsidiary owned by Japanese conglomerate Kirin Holdings. The corporate buyout reversed six years of employee ownership and its promises of democratic distribution of profits, equality among workers and the sustainability of the business. It was the equivalent of John Lewis being bought by Zara.

 

“I felt a real sense of loss when I woke up to read about the acquisition,” Rose said. “New Belgium’s success as a mission-led business that shaped an entire industry made me proud to be a part of the movement to promote employee ownership.” Rose and the Democracy Collaborative responded to news of the buyout with a series of soul-searching articles with names like, “Let’s not let ideal be the enemy of pretty-darn-great,” and, “Is your beer funding human rights abuses?”

 

“It was difficult for a lot of us to come down on what this meant for our work,” Rose reflected in The Next System Podcast, which is also produced by the Democracy Collaborative. On one hand, the sale could be seen as a success. As many as 300 individual worker owners of New Belgium approved the sale and would net $100,000 or more in retirement savings. Plus the business might not have been able to stay competitive or to continue to grow any further without the sale. But the sale also meant the end of employee ownership at New Belgium. After the acquisition, the business would be 100% owned by Kirin. The many participatory and democratic mechanisms that employees had benefited from during employee ownership would end.

“I thought the employees would make the best job of it, they would be morally right to take over the business and they would have the skills to take it on,” - Julian Richer

Employee-owned businesses are different from conventional firms in that they are totally or significantly owned by their employees. They typically have higher productivity and greater innovation than other businesses, more resilience to economic turbulence, and they are more likely to survive the first five years in businesses than other startups, according to the Employee Ownership Association. And they’re growing. The sector experienced record growth of almost 30% in 2019 alone, bringing the total number of employee-owned businesses in the UK to 470. Over half of conversions to employee ownership in the sector have occurred since 2017, spurred on by popular examples in the press such as Richer Sounds, the UK audio and entertainment chain that became employee-owned in May 2019. Its founder, Julian Richer, turned 60 and decided that, since he had no children, his employees should inherit his work.

 

“I thought the employees would make the best job of it, they would be morally right to take over the business and they would have the skills to take it on,” he told me last year. “I didn’t want to sell it to a third party who might wreck it, and I didn’t have a child groomed to take over.”

 

At the Evergreen Co-operatives, a pioneering network of employee-owned businesses in Cleveland, Ohio, co-op members have started a fund that addresses the problem of succession by buying up businesses from retiring owners without a natural heir. The Fund for Employee Ownership helps owners – typically baby boomers running businesses too small to become targets for mergers and acquisitions – to take care of their employees after they are gone by giving those workers a stake in the businesses and ensuring their employment into the future, thereby supporting the local economy. In February 2020, the fund acquired its first company, insulation business Berry Insulation, and set its 15 workers on the way to becoming owners of their workplace. “This structure will allow for a stronger economic future for our team and their families—something that is elusive for so many hard working people,” said Martin Berry, founder of the business.

Passing ownership of a business onto workers became a more attractive prospect for business owners in the UK after the Nuttall Review in 2012, when the Government changed the tax rules to make such sales exempt from capital gains tax. The switch also allows companies to pay tax-free bonuses to staff up to the value of £3,600 a year, though they still have to pay national insurance contributions.

But employee ownership is no get-rich-quick scheme for owners. It took Guy Singh-Watson, founder of the successful vegetable box scheme Riverford, 15 years of research and deliberation to hand his company to its employees. He had the company valued at £22 million but, rather than take a big windfall from a sale, he sold it for just £6 million in June 2018. Seventy four per cent of shares in the company went into a trust to benefit employees. One year later, Riverford delivered its best-ever set of company results, growing customers by 24% in the year to April 2019 and booking profits of £3.7 million.

Dino Pavledis is a canteen manager at Riverford and a member of the staff council that formed to represent each area of the businesses in decision-making. He sees the difference between working for an employee-owned firm compared to a conventional structure like the difference between renting and owning your own home. “Being employee-owned is like when you own your own home and you have a stronger connection,” Pavledis says. “You’re adding to it, your money is not just going to a landlord – you’re investing your time and your energy.”

Architects, law firms, engineers and other professional services are most likely to embrace employee ownership, rather than industrial or capital-intensive businesses. While the transition means that employees have a greater share of the profits of the business, employee ownership does not automatically lead to a culture change away from top-down management. That’s a major difference between employee ownership and co-operatives, which focus on minimising hierarchy and working towards collective self-management.

Dave Sproxton, co-creator of the popular animated character Morph, spent five years thinking about turning his Bristol-based animation studio Aardman over to employees before it happened in November 2018. On that date, Sproxton and Peter Lord, the two co-founders, sold 75% of shares in the company to a trust that would hold them on behalf of employees. Sproxton had considered making the business a co-operative, but felt the flat hierarchy wouldn’t work in such a competitive field. But he felt employee ownership might enhance the existing culture of Aardman as a collaborative, film-making enterprise. “It gives you an opportunity to look at the values,” he says. “When you are employee owned you have to communicate that this is what people are part of. It’s getting people to understand that with this approach you get a better deal.”

Sproxton saw employee ownership as an alternative to the traditional exit route for founders of smaller studios in his industry, which are typically swallowed by big monopolising companies like Disney and Endemol that take the most valuable assets and discard the rest. But the example of New Belgium shows that not all employee-owned businesses are immune from market forces like mergers and acquisitions.

Jason Wiener, a business consultant specialising in democratising ownership structures, says employee-ownership at New Belgium did not mean that workers could not control the enterprise. While they shared in profits, they could not stop the eventual sale. “They had an interest in the profit, but no legally enforceable control over the business,” he reflected on The Next System podcast. The trust that held workers’ shares, known as an Employee Stock Ownership Plan or ESOP, performed exactly how it was supposed to: creating wealth in a tax-efficient vehicle for past and current owners.

Employee ownership is a way to escape the soulless search for growth.

Employee ownership does not automatically secure perpetual wealth or perpetual ownership for employees, or the transformation of company culture to a flatter, less hierarchical model. But even with these limitations, it can seem radical in today’s start-up culture, where private equity is used to inflate small businesses and leverage buyouts, after which brands are often stripped of their valuable assets and discarded, leaving years of hard work on the scrap heap.

 

For Guy Singh-Watson, employee ownership is a way to escape the soulless search for growth and to stay true to the founding principles of a business that is built on the hard work of its employees as well as its founders.

 

“I think there is a fundamental belief in capitalism that greed is good and everyone will benefit. That’s just not true, it doesn’t trickle down, you just get wealth accumulating in a smaller number of hands in a way that is grotesque,” Singh-Watson says. “This is an appetite for something better – an expression of our better natures. People here feel they have control over their destiny and that’s brilliant.”