During the Mars Impact Week Conference, an interesting talk I listened to was with Bill Young, Founder of Social Capital Partners (SCP). Before creating SCP, Bill worked as the CEO of Hamilton Computers that later sold to GE Capital. Now, he has facilitated thousands of jobs for people who face employment barriers through social enterprise and the private sector by linking community hiring to attractive financing. SCP’s most recent program, the Employee Ownership Capital initiative, is focused on using institutional funds to increase employee ownership. 

In his talk, Bill touches on Employment Stock Ownership Plan (ESOP) based companies. ESOP is an employee benefit that gives employees ownership interest in their company. It’s a way for employees to buy the company from the entrepreneur. Most people are familiar with giving employees shares as incentives. However, this concept of employee-based ownership has been proven successful, especially during challenging periods. Research from Rutgers University’s Institute for the Study of Employee Ownership and Profit Sharing and others finds that during the 2008-2009 financial crisis, ESOP companies grew sales 11.1% while non ESOP companies grew by just 0.6%. 

In the States, there are benefits to ESOP combined with private equity investing (source). 

The upsides to ESOP include: 

• The day-to-day management being unchanged

• The company's board will continue to oversee operations

• Companies receive tax deductions and can become free of federal and most states’ income tax

• Partners hold control of transaction structure including an option for minority sale 

• A meaningful upside for management 

The pros of PE include:

• Selling partners usually receive up to about 70% of the purchase price upfront

• PE firm professionalizes operations through strategic plans

• PE firms can support a company in executing add-on acquisitions

Based on the benefits mentioned above, ESOP is an enticing option for companies based in the U.S. While it’s an enticing option for companies in the States, how does this translate to Canadian companies?

The U.S. has seen proven success with ESOP, however, Bill mentions that Canada is one of the few developed countries in the world that has no incentives around employee ownership. So, what SCP is trying to prove is that institutional capital is perfect for pension funds. They are working with a large Canadian pension fund to prove that a business can convert way more deals that would have gone to private equity in the States. Right now, they’ve written a paper on what Canada needs to do to incentivize ESOP and are working with government relations to get it implemented in our country. In addition to Social Capital Partners, employee-ownership.ca is another resource Canadians can consult for ESOP support. 

ESOP is an exciting opportunity for companies to become sustainable and drive economic benefits to its staff. I have seen quite an evolution through my experience in impact and sustainability investing, my participation at MaRs Impact Week and my career, including being on the board of the Atmospheric Fund. If you would like to discuss impact investing, sustainability and the ways that finance and investing are promoting the SDGs, then please contact me.