Employee Ownership Trusts with Jon Shell | E108
What they are and how Canada has implemented them.
In this episode of the "Financial Planning for Canadian Business Owners Podcast," host Jason Pereira interviews Jon Shell, the managing director and partner at Social Capital Partners. Jon is an advocate for employee ownership trusts in Canada. The episode discusses what employee ownership trusts are, the benefits they provide to employees, and the challenges faced in implementing them in Canada. The conversation highlights the changes in tax laws related to employee ownership trusts and Canada's first attempt at implementing them.
Episode Highlights
01:21: Jon Shell explains that Social Capital Partners (SEP) is a nonprofit organization based in Toronto, focused on finding financial techniques that promote ownership and good jobs in the economy. They aim to provide opportunities for those who have limited access to ownership or cannot secure good jobs.
03:16: Jon Shell explains that the objective of the employee ownership trust structure was to provide access to ownership for those who lacked it in the economy.
05:12: In the UK, the concept of an Employee Ownership Trust (EOT) was established in 2014, allowing companies to allocate profit sharing to all employees and sell the company to employees at no cost. Jon highlights the success of EOTs in the UK, with numerous companies adopting this structure.
06:20: Jon discusses the comparison between employee ownership trusts and employee share ownership plans or stock option plans.
06:21: Stock option plans (such as RSUs and DSUs) are commonly used in public companies and startups as a reward and retention tool, typically benefiting a minority of employees, especially senior executives.
07:47: The sale of shares to an employee ownership trust happens immediately, and all employees have access to it. It's not something that happens gradually over time. Stock option plans are typically more reward-oriented, while employee ownership trusts are designed for broader employee participation.
08:11: Employee cooperatives, or co-ops, are another option in Canada. They involve democratic ownership, where all employees have the right to vote on decision-making processes.
09:37: There is a well-known example of a massive Spanish company called Mondragon, which operates with a structure similar to Athenian democracy.
10:49 Jon talks about the incentive for the owner who wants to sell their business to an employee ownership plan.
11:11: In the UK, there was a structure that allowed people to use a leveraged buyout on behalf of employees.
12:30: In 2014, Canada waived the capital gains tax for owners who sold at least a majority (51% or more) of their company to their employees through the trust. This followed a similar program in the US.
13:39: The outcomes of employee-owned companies have been well studied and show positive results. They tend to be more resilient in recessions, have lower layoff rates, lower debt default rates, and faster growth.
14:27: While there may be concerns about business owners cashing out and not paying taxes on windfall gains, the democratic and equal distribution of ownership and benefits among employees, from executives to frontline staff, is a powerful aspect. The aim is to prevent wealth transfer solely among the already wealthy and ensure a more inclusive distribution of ownership and benefits.
15:23: For the vast majority of businesses, the concern about gaming the system or preventing certain types of businesses from benefiting doesn't hold true. Most businesses do not fall into the category of high-end consulting firms where only the wealthy benefit.
16:14: From a public policy perspective, it's crucial to recognize that companies will be sold to someone eventually. The current trend of frequent buying and selling of companies by individuals who have no long-term commitment or connection to the business is not sustainable. It's important to consider how we want the economy to be owned and prevent further concentration of ownership.
18:19: The success story of Friesens, a family-owned publishing company in Canada, demonstrates the benefits of employee ownership. By transitioning to a 100% employee-owned company, they have created a strong and thriving business.
23:03: The proposed legislation in Canada includes eligibility requirements related to Canadian ownership and introduces a governance structure where employees elect a trustee to govern the trust. The current proposal falls short in terms of providing meaningful incentives for employee ownership.
26:26: The Canadian government's attempt to address employee ownership is commendable, as it is the first time such legislation has been introduced in the last four decades. However, the implementation of the proposal fell short in addressing the key concerns and providing sufficient incentives.
3 Key Points
Jon shares the success story of the employee Stock Ownership Plan (ESOP) in the US, which has grown to include 6,500 companies and 14 million American workers.
Jon explains how co-ops can be effective forms of employee ownership, but they are typically applied to smaller firms.
The lack of tax incentives beyond deferral is a significant drawback. It creates a situation where there is no real incentive for owners to consider employee ownership beyond personal benevolence.
Tweetable Quotes
"Employees get access to shares at a certain price and can exercise them later to participate in the company's growth." - Jon
"For larger companies with hierarchical structures, owners may be concerned about the risks associated with selling to a co-op, especially if the company has not operated in that manner before. Co-ops can be effective forms of employee ownership, but they are typically applied to smaller firms." - Jon
"Setting up a worker co-op with more traditional governance and committees can be burdensome and costly. In larger companies, it may be challenging for employees to afford the shares necessary to buy the company." – Jon
"In the UK, where a tax incentive was introduced, approximately 5 to 10% of companies sell to their employees through an EOT every year, a significant increase from zero. In the US, the percentage is smaller, around 1 to 2% of transactions, due to a more complicated structure. The success of employee ownership trusts in these countries highlights the need for incentives to encourage their use." - Jon
Resources Mentioned