Phelan M. Ebenhack via AP
How much of an ownership stake will a sales clerk or line cook actually get, and would it be in line with boosts in productivity and reductions in turnover for the overall business?
A group of private equity investors have launched a nonprofit that will help them give equity grants to ordinary employees at their portfolio companies.
Founded by Pete Stavros, co-head of private equity at the venerable corporate raider Kohlberg Kravis Roberts (KKR), the nonprofit debuted last month with commitments from 19 private equity funds to implement employee ownership programs in at least three of the companies they control by the end of 2023. Pension fund executives in Michigan, California, Washington, New York City, and New York state are also promoting the nonprofit, which is called Ownership Works.
It’s not the only group promoting employee ownership, long a lefty idea to increase the share of profits going to labor. But it gained a powerful platform at this year’s Milken Conference, an elite gathering in Beverly Hills, where dismal worker retention rates and demand for more compassionate investing were recurring themes.
“Free enterprise is under attack,” Jonathan Sokoloff, managing partner at a participating private equity firm, said at one panel. His firm, Leonard Green, became notorious during the pandemic for bleeding $400 million from a hospital system that serves mostly poor patients. At a talk on the future of finance, Sokoloff touted the firm’s support for Ownership Works as a key way they are responding to calls for ESG (environmental, social, and governance) investing.
“We’re going to try harder to spread ownership widely among our companies, first and foremost because it’s good for our investors,” Sokoloff said.
While they may fatten investor returns, it is not yet clear how substantial the employee ownership packages will be for workers. Ownership Works is designing bespoke programs for participating companies, though they must all meet some minimum standards. The equity grants could be structured as tradable shares, options, restricted stock units, or other forms of equity. They will be given as free benefits to workers who earn less than $100,000, and must represent potential future earnings of at least half an employee’s annual salary.
Owning stock will not give employees governance power, since privately held firms do not have shareholders. But supporters say that during a period of high labor turnover, it could help lower the quit rate and boost worker productivity. At another panel, Leonard Green partner John Danhakl said that the firm has seen higher profits at companies where they have tried out the employee ownership model.
Beyond that, Danhakl said, employee ownership has been a vehicle for spreading wealth. He cited the example of Mister Car Wash, a national chain whose annual employee turnover was at one point 100 percent. When Leonard Green took it public last year and instituted an employee stock purchase plan, he said, more than 100 employees made over $1 million, with one general manager in Eden Prairie, Minnesota, making over $3 million. (The Prospect wasn’t able to independently confirm this.)
But aside from anecdotes, the promoters of employee ownership have been short on details. In fact, the lack of disclosure requirements and absence of quarrelsome shareholders in private equity–owned companies may be part of the attraction. Danhakl said he anticipates similar programs gaining traction in privately owned companies first.
The last time the investor class touted the benefits of an ownership society was during the housing bubble.
Those details matter. Private equity portfolio companies employ more than 11.7 million workers, according to the Private Equity Stakeholder Project. Many are in low-wage industries like restaurants and retail. Meanwhile, high returns to a sliver of the most elite investors have been the norm for this rarefied asset class. A roaring asset price boom has deepened inequality and particularly widened the racial wealth gap over the past decade. Since the financial crisis, the owner class has seen its wealth rise astronomically, while regular families have been shut out. The bottom half of households own just 0.6 percent of stocks and mutual funds.
How much of an ownership stake will a sales clerk or line cook actually get, and would it be in line with boosts in productivity and reductions in turnover for the overall business? Would workers with erratic schedules, the norm in many of these industries, getting less than 30 hours a week qualify for the equity stake? Would this potential largesse, which could take years to truly pay off before the company gets spun back out to public markets, serve as an add-on to existing salary and benefits, or a substitute? Is this an attempt to deflect a surge in worker organizing in lower-wage service businesses like Starbucks by offering an undefined benefit? None of these questions have been answered.
Instead, the talk from Ownership Works has been abstractions with a hint of penitence. Ownership Works executive director Anna-Lisa Miller said the project is “particularly important as the traditional pathways to building wealth get further and further out of reach for so many workers.”
Private equity funds have experimented with employee ownership in the past. Employee stock ownership plans (ESOPs) gained traction in the 1980s amid a surge in leveraged buyouts, mergers, and acquisitions. But the plans were criticized as being heavily skewed toward management, with tax benefits flowing back to commercial lenders rather than participating employees, and with stock ownership often replacing, rather than adding to, existing benefits such as pension plans.
Stavros, who contributed $10 million to launch Ownership Works, has experimented with employee ownership models at KKR for several years. He wrote his Harvard thesis about ESOPs, but said in an interview at Davos earlier this year that he has thought better of that structure, which can lead companies to clash with the Department of Labor. His idea in launching Ownership Works, he emphasized, is to be more flexible. That flexibility could imply that there are few guarantees—such as whether programs stick around and whether they replace other benefits, like pensions and cash compensation.
Michael Milken, the former junk bond trader who spent years in prison for securities fraud and now heads the Milken Institute, chaired the panel on Ownership Works, which his private foundation also supports. He emphasized a different set of reasons to support employee ownership: It could encourage household saving. Ownership Works heavily emphasizes financial literacy and instilling a “culture of ownership.”
“One of the challenges as I look back over the last 50 years is trying to get people to appreciate what compounding can do, and trying to get them to appreciate investing money, not spending money,” Milken said. Plus, he said, employees “feel differently about the company if they perceive that they’re an owner.”
Allyson Tucker, CEO of Washington State Investment Board, struck a similar note at the panel. “We have a very strong belief in the ownership mindset that the private equity model brings,” she said. “Broad employee ownership can be transformative for workers, especially the most marginalized workers. But it’s also empowering, because the ownership mindset creates this circular engagement and feedback mechanism with employees and managers that drives productivity.”
The last time the investor class touted the benefits of an ownership society was during the housing bubble, when unsuspecting families plowed their savings into new homes using exotic mortgage instruments. That episode ended with millions of foreclosures. That may not be the outcome here, but the equity stake of a bankrupt business—more than 15 percent of private equity–owned retailers went bankrupt over a 15-year period, according to a 2018 investigation by Retail Dive—is worthless.
Nonprofit status is a striking choice of corporate form for an entity being touted as a vehicle to boost the returns of private equity companies. Not-for-profit corporations were originally exempt from tax because they carried out “exclusively public purposes.” Yet the founders of Ownership Works insist that the program is designed, first and foremost, to boost their bottom line.
Milken isn’t the only high-profile backer for the project. Other supporters include the Rockefeller Foundation, the Omidyar Network, and the Ford Foundation, which has sought to be a trailblazer in “impact investing.” President Obama’s National Labor Relations Board chair, Wilma Liebman, will sit on the board, and Andy Stern, a former head of SEIU whose liaison with private equity stretches back a decade, has been a prominent booster.
In between sitting on the board of a private equity–backed biowarfare company and becoming a promoter for employee ownership, Stern wrote a book on universal basic income, another superficially labor-friendly program that could in practice erode the power of ordinary people. In an interview with the Prospect, Stern acknowledged that employee ownership programs won’t necessarily lead to more unionization, though he’s not ruling out that possibility.
“If a union was there, everything would potentially be taken to another step, because the workers would exert power, instead of just ‘management gave us this,’” Stern said. But the better reason to do it, he said, is simply that “workers don’t have assets. And private equity companies are usually pretty successful in what they do.”
