Stakeholder Ownership Coordinates Capital Work

Stakeholder Coordination & Equitable Ownership

If we can recognize the value of entrepreneurial leadership and learn to build shared resources, services, and assets to empower and equip our entrepreneurial leaders, what becomes possible in terms of stakeholders building wealth through community-coordinated economic development?

At some point we have to look at ownership structures. Conventional ownership structures subordinate the interests of entrepreneurs to those of investors and landlords. What types of ownership structures could actually promote entrepreneurial leadership and align incentives amongst all the stakeholders in a community?

While investing in the development of a regional network of assets and operating businesses, Sparrow is also experimenting with equitable ownership structures in partnership with employees, managers, tenants, and other stakeholder groups.

The Employee-Ownership Movement Offers an Established Precedent

Stakeholder ownership frameworks are designed to cultivate entrepreneurial leadership and reward capital work. They align incentives and enable stakeholders to participate equitably in the wealth created through their collaborative efforts to bring undeveloped capital to life.

Demonstrations of stakeholder ownership in practice can be observed in the proliferation of employee-owned businesses in the United States since the introduction of the Employee Stock Ownership Plan (ESOP) under the Employee Retirement Income Security Act (ERISA) of 1974.

As of 2020 there were approximately 14 million employees participating in public and privately held ESOPs in the United States across a range of industries, representing nearly 10% of the US workforce.

In Canada, federal initiatives to promote employee ownership have been embarrassingly inept. Nonetheless, substantial businesses such as PCL Construction, Chandos Construction, Spartan Controls, E.B. Horsman, Gregg Distributors, Clark Builders, Friesens Corporation, Silvacom, and many others have evolved to demonstrate how effective employee ownership can be in Western Canada, even without the considerable tax incentives available in jurisdictions such as the US and UK.

Studies of ESOPs consistently demonstrate that they outperform conventional businesses; they pay 5-12% more in wages than average; they have higher survival rates during periods of economic distress; they hire more workers than average businesses during periods of low employment; they contribute more to retirement security, with some studies evidencing ESOP employees retiring with 3x the retirement assets of average workers; and ESOP employees tend to be more active in their communities and participate in volunteer work at nearly double the rate of the average population.

For more about employee ownership research and resources, see https://sparrow.capital/employee-ownership-resources/.

A Culture of Ownership Requires Transparency, Empowerment, and Accountability

Researchers and advocates agree that the impressive results of employee ownership are not achieved simply through the implementation of a particular corporate structure. If people are going to be owners, they need to know how to own things, and owning things is hard, and working with capital is dangerous. For stakeholder ownership models to work, we must also nourish a culture of ownership based in transparency, empowerment, and accountability.

The most successful employee-owned companies operate on a basis of participatory open-book management and deliver high-quality information to their teams on a consistent frequency. They distribute intelligence, decision-making power, and accountability throughout the workforce and they incentivize stakeholders with equitable participation in the rewards of productive leadership and coordination.

People are people and developing such a culture can be daunting. Fortunately, there are many precedents we can draw on.

Stakeholder Ownership Spawns Networks of Competence in Entrepreneurial Leadership

The phenomenon of stakeholder ownership spawning diversified ecosystems of local businesses is a common pattern. Stakeholder-owned businesses produce a community of competent entrepreneurial leaders who know how to work together. The culture and resources developed by their community allows these leaders to easily seize opportunities when they arise in adjacency to the original business ecosystem. This proliferation of new, adjacent ventures creates yet more interconnectedness with many layers of entrepreneurial competence and leadership.

There’s a template here. Community-coordinated economic development is like nature itself—cultivated from the ground up at the local and regional level.

Stakeholder Ownership Solves for Business Succession

Stakeholder ownership also provides an effective alternative for business owners who are moving toward retirement and in need of a succession plan. According to the Canadian Federation of Independent Business (CFIB), over 76% of business owners surveyed in their 2023 study said that they intended to sell their businesses at some time in the next decade, while only 9% had a workable succession plan in place. The business assets represented by these owners are worth more than $2 trillion and the biggest obstacle they face is the challenge of finding qualified buyers.

When a business owner wants to sell a business, we can seek a merger or sale opportunity with a larger entity, court private equity firms, or seek a business operator to purchase the business directly. These conventional options have their place. But in many cases they are fraught options, resulting in discounted equity for the business owner, layoffs for employees, and long-standing community-integrated assets and businesses cannibalized by remote ownership through the agency of short-term results, quarterly earnings, executive bonuses, and consulting fees.

Stakeholder ownership is an excellent alternative. Succession through stakeholder ownership can be cultivated gradually, well in advance of the original owner’s final exit. Employees engaged in a culture of ownership and entrepreneurial leadership come to know the business well. They are often the people who are best positioned to assume leadership and continue to optimize the business. Stakeholder ownership conversions provide owners with an equitable exit at a fair market price. They also protect the interests of the community of employees who had helped to build the business under the previous ownership, and provide those employees with a chance to build equity for their families through continued development of the business.

When a company is purchased by its labour force through a stakeholder ownership conversion, the employees of that company suddenly become capital workers. Such transitions have been achieved many times in the employee ownership movement: whole communities of stakeholders have transitioned from being pure labour workers to become participating capital workers. This powerful vehicle equips people to work with capital, generating high-fidelity waves of entrepreneurial leadership, community capacity, and regional wealth.

Part four of this series, Open Equity Is the Evolution of Stakeholder Ownership, explores the Open Equity Partnership Framework, prototypes in development, and the Open Equity Foundation.