After 20 years of fighting income inequality, Toronto-based Social Capital Partners (SCP) thinks it has found a way to move the needle on Canadian prosperity: by reinventing employee ownership.
SCP was founded by tech entrepreneur Bill Young, who made two fortunes in the 1990s and has spent 20 years giving away money to boost the prosperity of people who face employment barriers. SCP has gone through three phases: investing directly in social enterprises, developing innovative social-finance tools, and promoting innovative employee-training programs. Now Young and his team are focusing on a new solution: enhancing workers’ capital, rather than income, to increase prosperity and their resilience to economic shocks (say, the next pandemic).
How do people accumulate wealth? Usually through financial assets, such as stocks and bonds. After exploring various paths, SCP concluded that putting more shares into employees’ hands solves multiple problems:
• it helps workers build long-term wealth;
• it avoids the risks of new, inexperienced leadership after the founders or owners sell; and
• it bypasses the nefarious private-equity investors, who snap up companies in transition, looking for fast paybacks through mergers, layoffs and asset sales rather than by stewarding ongoing growth.
In addition, says SCP partner Jon Shell, worker-owned companies fare better than conventional businesses. In the U.S., where legislation encourages companies to borrow money to transfer shares at no cost to their employees over time, research indicates these firms grow faster, achieve higher profits and pay employees more.
The U.S., says Shell, now has about 6,400 employee-owned companies, with 14 million employees who share – wait for it – US$1.4 trillion in wealth. Canada, sadly, has only a handful of such companies – because our employee-stock-ownership plans (ESOPs) are mainly designed to sell (not give away) shares. And those shares go mainly to an elite group of affluent executives.
Moreover, when SCP investigated the U.S. landscape, it saw an untapped opportunity – to encourage huge pension funds to invest in ESOP companies. (Their loans compensate owners for giving up equity and are repaid over time from the proceeds of the business.)
SCP is now taking a two-pronged approach to encouraging employee ownership. First, it’s encouraging Canadian pension funds – many of which are looking for more opportunities for impact investing – to start lending to American ESOP companies. “If we can demonstrate how pension money can be used to support employee ownership while generating an attractive return,” he says, “we think we can move billions of dollars into the sector, resulting in billions more in employee wealth.”
Second, SCP has launched a campaign to bring more robust ESOP legislation to Canada, to give lower-income employees a better chance to build wealth. Shell says SCP is embarking on a lobbying campaign to get Canada to adopt the American “employee ownership trust” model, as the U.K. did in 2014. Since then, he says, employee ownership in the U.K. has grown 150%.
After years of opposing wealth concentration, Shell believes SCP has finally found a winning strategy. “It often seems we’ve been fighting an almost impossible battle. But for the first time it feels like we have a tank, not just a pistol.”